ENVIRONMENTAL ANALYSIS

Godfrey Akileng

ENVIRONMENTAL ANALYSIS
 Where are we as a business?
 A business enterprise does not operate in a
vacuum. It operates in an environment and its
success does not only depend on its competences
but on how quickly and effectively it can respond to
the changes in this environment.
 Environmental analysis refers to the monitoring,
evaluating and disseminating of information from
the external environment with the objective of
identifying threats and opportunities and assessing
their impact given the company’s internal strengths
and weaknesses.

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 Environmental variables
Political legal Macro Environment Technological
Environment Environment
Industry
Environment
Competitors
Community

Organizational
Customers environment Suppliers

Creditors
Government
Labor unions
Demographic
Environment Macro-economic
environment
Social environment

Why study the environment?

 Environmental factors influence strategic choice -
provides information on the nature of competition
as a step to developing sustainable competitive
advantage
 Helps organizations to identify opportunities that
might be explored and threats that need to be
contained
 Enhances the possibilities for strategic networks
and other linkages which lead to sustainable
co-operative linkages that may strengthen an
organization in its environment
 Enables companies to measure their strength and
weaknesses and how they could be used to manage
the external environment.

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 BASIC STAGES IN ENVIRONMENTAL ANALYSIS
Stage Techniques Outcome of stage
VUCA World General strategic conclusions:
1. Global business landscape  Is the environment too turbulent to undertake useful
Volatility predictions?
Uncertainty  Change: fast or slow
Complexity  Repetitive or surprising future?
Ambiguity  Forecastable or unpredictable?
 Complex or simple influences on the organization
 What are the opportunities and threats for the
organization?

2. National context STEEP analysis and scenarios  Identify key influences

 Predict, if possible
 Understand interconnections between variables
3. Industry context Industry life cycle  Identify stage of the industry and cyclicality issues
 Consider implications for strategy

 Factors specific to the Key factors for success analysis  Identify factors relevant to strategy
industry: What delivers  Focus strategic analysis and development
success?
 Factors specific to the Five Forces analysis  Descriptive analysis of competitive forces
competitive balance of
power in the industry
 Factors specific to co- Four Links analysis  Analysis of current and future organizations with
operation in the industry whom co-operation is possible
 Network analysis
4. Factors specific to Competitor analysis  Competitor profile
immediate competitors
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5. Customer analysis Market and segmentation studies  Strategy targeted at existing and potential customers

MACRO/SOCIETAL / EXTERNAL
ENVIRONMENT (PESTE) ANALYSIS

Political/Legal factors
 Political stability
 Political ideology
 Legislation, e.g. on taxation and employment
 Relations between government and private business
organizations
 Government attitude towards foreign companies
 Government regulation and deregulation
 Foreign policies
 Regulations on foreign ownership of assets
 Patent rights
 Environmental laws

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Economic factors
 Total GDP and GDP per head (trends)
 Inflation rates
 Consumer expenditure and disposable income
 Interest rates
 Currency fluctuations and exchange rates
 Unemployment levels
 Energy , transport, communications and raw
material costs
 Economic system and structure-free enterprise or
controlled

Socio - cultural factors

 Shifts in values and culture
 Language
 Change in lifestyle
 Attitudes to work and leisure
 Education and health
 Demographic changes
 Attitude towards foreigners
 Group behavior
 Aesthetics
 Religion

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 Technological factors
 New research initiatives
 New patents and products
 Cost of technology
 Speed of change and adoption of new technology
 Level of expenditure on R&D by organization’s
rivals
 Developments in seemingly unrelated industries
that might be applicable
 Rates of obsolescence
 Customers attitude towards technology
 Regulations on technological transfer

External Environmental Analysis

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 INDUSTRY/TASK /OPERATING
ENVIRONMENT

This includes those elements or groups in the

immediate environment of a company that
directly affect the corporation and in turn are
affected by it. An industry is a group of firms
producing products or services that are
similar or are close substitutes to each other.
According to Michael Porter the nature and
the degree of competition in an industry
hinge on five forces that drive competition in
the industry; the threat of new entrants, the
bargaining power of buyers, the bargaining
power of suppliers, the threat of substitute
products or services, rivalry among existing
firms.
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Porter’s five forces model

Threat of the
Potential
entrants

Bargaining Rivalry among Bargaining

power of the existing
firms
power of
buyers suppliers

Threat of
substitutes

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Threat of potential entrants

The strength of the competitive force of

potential rivals is largely a function of the
height of the barriers to entry:
 Brand Loyalty
 Economies of scale

 Capital requirements

 Absolute cost advantages

 Access to distribution channels

 Government

 Retaliation of the existing firms

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Rivalry among existing firms

The extent of rivalry among established companies wit in an
industry is largely a function of three factors:
 Industry competitive structure
 Fragmented industry structure
 Consolidated industry structure
 Rate of industry growth
 Height of exit Barriers
 Investments in plant and equipment that have no
alternative uses and can not be sold off
 High fixed costs of exit such as severance pay to
workers in case they are laid off
 Strategic relationships between business units – a low
return business unit may provide vital inputs for a
higher return business based in another industry
 Emotional attachments to the original industry
 Economic dependence on an industry-not diversified

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Bargaining power of buyers
A buyer or a group of buyers are most powerful in the following
circumstances;
 When buyers purchases in large quantities and can therefore use
their purchasing power as leverage to bargain for price
reductions.
 When the supply industry is composed of many small companies
and the buyers are few and large.
 When the supply industry depends on the buyers for a large
percentage of its total orders
 When buyers can switch orders between suppliers at low costs
e.g. office supplies are easy to find.
 The purchased product is unimportant to the final quality or
price of a buyer’s products or services and thus can be easily
substituted without affecting the final product adversely for
example, electric wire bought for use in lamps.
 When buyers can use the threat to supply their own needs
through back ward integration.

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Bargaining Powerful suppliers

Suppliers are most powerful in the following circumstances;
 A few companies dominate the supplier industry, but it
sells to many for example, the petroleum industry.
 Its product or service is unique and it has built up
switching costs.
 Substitutes are few or not readily available e.g. electricity
 Suppliers are able to integrate forward and compete
directly with their present customers e.g. the original
microprocessor producer like Intel that now makes PCs.
 A purchasing industry buys only a small portion of the
supplier group’s goods and services and is thus
unimportant to the supplier.
 Companies/buyers are unable to supply their input
needs through backward vertical integration.

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 Threat of substitute products
The threat of substitutes is determined by
the following;
 The relative price of substitutes
 Quality of substitutes in terms of
performance features; reliability,
conformance to
standards,durability,serviceability,
aesthetics and the product’s
overall reputation.
 Switching costs

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Relative Power of other stakeholders

All stake holders can justifiably expect that the company will attempt
to satisfy their particular demands;
Internal claimants:
 Stockholders provide the enterprise with capital and in exchange expect
an appropriate return on investment
 Employees supply labor and skills and in exchange expect
commensurate income and job satisfaction
External claimants:
 Competitors seek fair competition or else may file anti trust suits
 Suppliers seek dependable buyers
 Customers want value for money
 Labor unions demand commensurate benefits for their members or else
may engage in disruptive labor disputes
 Governments insist on adherence to legislative regulations
 Local communities want companies that are responsible citizens
 General public seeks some assurance that the quality of life will be
improved as a result of the company’s existence

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 Industry Analysis

Five-plus forces of competition

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INDUSTRY EVOLUTION
Most industries pass through a
series of well defined from growth
through maturity and eventually into
decline. This industry evolution is
what is referred to as industry life
cycle. Each stage of industry lifecycle
is accompanied by a particular
industry environment presenting
different opportunities and threats.

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 Stages of Industry Life Cycle

Embryonic

Shakeout

Maturity
Demand

Decline
Growth

Time

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Embryonic industry environment

 First stage of the industry life cycle
 Growth is slow because buyers are unfamiliar with the
industry’s product
 High prices due to inability of companies to reap any
significant economies of scale
 Poorly developed distribution channels
 Barriers to entry tend to be based on access to key
technological know-how rather than cost economies or
brand loyalty
 Rivalry is based not so much on price but upon educating
customers, opening up distribution channels and perfecting
the design of the product
 The company that solves the design problem first gets an
opportunity to develop a significant market position.
 The companies can generate a lot of capital internally and
thus its success depends on its ability to demonstrate a
unique competence to attract outside investors or venture
capitalists

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Growth stage
 The demand for industry product begins to take off
 Demand is expanding rapidly as many new
consumers enter the market
 Technological knowledge ceases to be a barrier to
entry
 Barriers to entry tend to be low since few companies
have achieved significant scale economies or
differentiated their product sufficiently to guarantee
brand loyalty
 Many firms are attracted to enter the industry though
paradoxically high growth levels means that new
entrants can be absorbed in an industry without a
marked increase in competitive pressure.
 Here strategically aware companies prepare
themselves for intense competition a head in the
industry shakeout

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Industry shakeout
 Companies are awakened by the reality that the
explosive growth can not be maintained indefinitely
 Demand approaches saturation levels, growth rate
slows and the industry enters into a shake out.
 Rivalry becomes intense and demand is limited to
replacement demand
 Companies produce under excess productive
capacity and resort to price cuts as a method of
competition
 This drives many of the inefficient companies into
bankruptcy
 Efficient companies that have brand loyalty and low
cost operations survive and stabilize because the
industry becomes less attractive for new entrants.

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Mature industries
 The market is totally saturated
 Growth is very low or zero – what ever little growth
there is comes from population expansion
 Barriers to entry increase – companies have built
brand royalty
 Companies consolidate and become oligopolies
 Companies tend to recognize their interdependence
and the stable demand gives them the opportunity to
enter into price leadership agreements
 However a general slump in the economic activity can
depress industry demand leading to further price wars
 As companies fight to maintain their revenues in the
face of declining demand, price leadership agreements
break down, rivalry increases prices and profits fall
and the industry enters into a decline

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Declining industries
 Eventually most industries enter decline
stage
 Growth becomes negative for a variety of
reasons; technological substitution, social
&demographic changes, international
competition
 Depending on the speed of decline and
height of exit barriers competitive pressures
can become as fierce as in the shake out
stage
 Falling demand leads to excess capacity
which results into price wars pushing
companies further down the drain.
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 Criticisms of the industry life cycle

 It is difficult to determine the duration of some life

cycles and to identify the precise stage an industry
has reached
 Some industries miss stages or cannot be clearly
identified in their stages, particularly as a result of
technological change
 Companies themselves can instigate change in their
products and can as a result alter the shape of the
curve
 At each stage of evolution, the nature of competition
may be different: some industries have few
competitors and some have many regardless of where
they are in the cycle. This may be a far more
important factor in determining the strategy to be
pursued.

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BUSINESS LEVEL STRATEGIES AT EACH

STAGE OF INDUSTRY LIFE CYCLE

Stage of industry life Strong competitive Weak competitive

cycle position position

Embryonic Share building Share building

Growth growth Market concentration

Shakeout Share increasing Market

concentration/liqui
dation

Maturity Hold & maintain/profit Harvest or

liquidation/divestitu
re
Decline Market concentration, Turnaround,
harvest or asset liquidation, or
reduction divestiture

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Key factors for success
 Are those resources, skills and attributes of the
organization in the industry that are essential to
deliver success in the market place
 Success often means profitability, but may take on
broader social values in the public institutions
 KFS are common to all the major organizations in
the industry and do not differentiate one company
from another
 When undertaking a strategic analysis of the
environment, the identification of the KFS for an
industry may provide a useful starting point

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ANALYZING THE CO-OPERATIVE

ENVIRONMENT
As well as competing with rivals, most
organizations also co-operate with others:
 It may help in the achievement of
sustainable competitive advantage;
 It may produce lower costs;
 It may deliver more sustainable
relationships with those outside the
organization
The objective of this analysis is to establish
the strength and nature of the co-operation
that exists between the organization and
its environment.

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 The Four Links Model
Informal
Government Co-operative
links and links and
networks networks

The organization

Complementors

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Informal co-operative links and

networks
 Informal co-operative links and networks are the
occasions when organizations link together for a mutual
or common purpose without a legally binding contractual
relationship
 By their nature, they may occur by accident as well as by
design.
 They may include many forms of contact ranging from
formal industry bodies that represent industry matters
with other interested parties. i.e. UMA- to informal
contacts that take place when like-minded individuals
from a variety of industries meet at a social function
 The analysis will need to assess the opportunities that
such links and networks present. Occasionally, there
may be also threats from such arrangements.

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Formal co-operative linkages
 Formal co-operative linkages can take many
business forms but are usually bound together by
some form of legal contract
 They differ from the networks mentioned earlier in
the higher degree of formality and permanence of
the link with the organization
 Links are shown in alliances, joint ventures, joint
shareholdings and many other deals that exist to
provide competitive advantage and mutual support
over many years.
 The strengths and weaknesses of such linkages
should be measured in terms of their depth,
longevity and degree of mutual trust

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Complementors
 Complementors are those companies
whose products add more value to the
products of the base organization than they
would derive from their own products by
themselves. e.g. computer hardware
companies are complemented by software
that goes with them.
 In strategic terms, there may be real
benefits from developing new
complementor opportunities that enhance
both parties and contribute further to the
links that exist between them.

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Government links and networks
 Government links and networks concern the
relationships that many organizations have with a
country’s national parliament, regional assemblies and
the associated government administrators. e.g AGOA
 Government links and networks can be vital in tax and
legal matters, such as the interpretation of competition
law
 Governments can also be important customers of
organizations
 Outside organizations should therefore consider the
opportunities and threats posed by government
activities. These may form a significant part of their
corporate strategic development, especially at very senior
levels within the organization

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Comment on Four Links Model

 At least in part, the model may not have the
precision and clarity of the Five Forces Model and
other competitor analyses: networks come and go,
complementors may come to disagree, alliances
may fall apart and governments fail to be re-
elected.
 Linkages may however, provide opportunities to
experiment and develop new and original strategies.
They may also allow an unusual move in strategy
development that will deliver sustainable
competitive advantage
 Hence, even though they may be imprecise and
lacking in the simplicities of economic logic, such
linkages deserve careful analysis

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 Analyzing the immediate competitors
(competitor profiling)

Competitor profiling seeks to identify the strategic resources of rivals and to

explore the following areas;
 Objectives, goals and aspirations – seeking sales growth, market share
growth or profit growth
 Resources - financial,physical,human,technological and organizational
resources of the company
 Past record of performance
 Current products and services – you need to analyze customers, quality,
performance, after-sales service, promotional material etc
 Links with other organizations – joint members, alliances and other forms of
co-operation may deliver significant competitive advantage
 Present strategies – attitudes to innovation, leading customers, finance and
investment, human resources management, market share, cost reduction,
product range, pricing and branding all deserve investigation
 What has competitor done in the past one year to change the playing field?
 What is their strategic intent?
 Has anyone introduced game-changing products, new technologies or a new
distribution channel?
 Are there any new entrants and what have they been up to in the past year?
(stealing key sales people, introduced new products, mergers)

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Analyzing the customer and market

segmentation
The focus of the purchase decision for the
customer is a competitive selection
between the different products or services
on offer.
There are 3 useful dimensions to the analysis
of the customer:
 Identification of the customer and the
market
 Market segmentation and its strategic
implications
 The role of customer service and quality

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Identifying customers and the market

 Who are our customers; both current

and potential customers?
 What do they buy?
 Why do they buy?
 When do they buy?
 Where do they buy?
 How do they buy?

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Importance of market segmentation

for Strategy:

 Some segments may be more

profitable and attractive than others
 Some segments may have more
competition than others
 Some segments may be growing
faster and offer more development
opportunities than others

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 Qualities of a good market segment

 Distinguishable
 Must have a sustainable potential to
justify the commitment of resources
 Must have the ability to purchase
 Must be reachable
 Big enough to guarantee reasonable
returns

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Approaches to making sense of the environment

ENVIRONMENTAL
Simple CONDITIONS Complex

Decentralisation
Static Trend extrapolation or Delphi analysis

Strategic
ENVIRONMENTAL analysis
CONDITIONS

Experience Scenario
and learning planning
Dynamic

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 Assess the nature of the
environment

Audit environmental
influences

Identify key
competitive forces

Identify
competitive position

Identify key
opportunities
and threats

Strategic
Strategic
position
position

Strategic Assessment-Steps in environmental analysis

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“Our business in life is not to get

ahead of others, but to get ahead of
ourselves - to break our own
records, to outstrip our yesterday
by our today.” Stewart B. Johnson

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