Chapter 6: Strategic Environmental Analysis Tools and Techniques

Strategic Management Tools used to Analyze the Physical Environment

- One of the best procedures to analyze a company's environment is to determine the key elements existing in
that environment. The following are the key elements of the physical environment:

1. Physical resources (eg, Raw materials, arable land, and availability of fresh water)
2. Climate (eg., Temperature and weather-related events such as floods and storms)
3. Wildlife

Objective of the Analysis

• to determine the possible strategic factors that can reduce the negative or unfavorable
impacts of the expected changes on the physical environment of a company
• the analysis aims to evaluate the impact of a company's activities on the physical
environment.

Strategic Tool, Approach, or Model to Use in the Analysis

-The strategic approach that is used to analyze the physical environment is environmental
scanning.

-The analysis should include information about the global and local environments. To analyze the
physical or natural environment, the following steps are to be performed:

1. Identify likely elements under a strategic factor (eg, shortage of raw materials under physical
resources).
2. Collect relevant information or data from reliable sources.
3. Assess the likely impact on the company (e.g., low, moderate, or high).
4. Classify the likely elements as opportunities or threats if the impact is judged as moderate.
5. Define the strategies to be adopted at various levels.

Table 6.1 Physical Environment Matrix

Strategic Management Tools used to Analyze the Societal Environment

The following are the strategic factors of the societal or general environment:
1. Political or legal segment
2. Economic segment Sociocultural segment
3. Technological segment
Objective of the Analysis

• to determine the trends of the strategic factors that are relevant to the growth of an industry.

Strategic Tool, Approach, or Model to Use in the Analysis

• The approach used is an environmental scanning, and

• the specific strategic tool used to scan the societal environment is the PESTEL or STEEP
analysis
• This approach is supported by environmental monitoring.
• The data used in the analysis come from secondary sources.

Table 6.2 PESTEL Analysis Matrix

Strategic Management Tools used to Analyze the Industry Environment

The industry or task environment is the immediate environment surrounding a business.
The strategic factors of the industry environment are as follows:
1. Customers
2. Suppliers
3. Creditors
4. Employees
5. The government
6. Competitors

Objective of the Analysis

• to determine the different forces that drive competition and the extent of the competition so a company
can position itself in an industry.

Strategic Tool, Approach, or Model to Use in the Analysis

• The analysis of the industry environment requires the use of the three methods of collecting data for
strategic analyses. In this case, there is a need to scan, monitor, and conduct competitive intelligence
on the different forces that influence competition in an industry.
• Data used in the analysis come mainly from secondary sources.
• The commonly used tool to analyze the industry environment is Porter's five forces of competition
model.
Porter's five forces of competition model evaluates the level of competition and assesses the
attractiveness of an industry itself. The model consists of the following strategic factors:

1) Rivalry among competing companies 2)Threats of new entrants 3)Bargaining power of buyers 4)Threats of
substitute products 5) Bargaining power of suppliers

To effectively use this model, the following steps should be performed:

1. Identify the barriers to the forces of competition.

2. Gather information about the barriers from reliable sources.
3. Assess the barriers as low, moderate, or high in terms of strength.
4. Rate the force whether it is a threat or not.
5. Assess the entire industry.

Strategic Management Tools used to Analyze the Internal Environment

Strategic Factors of the Internal Environment:

1. Corporate Culture
2. Organizational Structure
3. Business Resources

Objective of the Analysis:

-The objective of conducting an internal environment analysis is influenced by the type of strategic factor being
analyzed and the strategic tool used in the analysis.

Table 6.4 Internal Environment Strategic Factors and the Objective of the Analysis

Strategic Factors Objective of the Analysis

Corporate Culture To determine how culture influences
strategy formulation
Organizational Structure To determine what structure can
effectively and efficiently achieve
organizational goals
Business Resources To determine which business resource
contributes to the achievement of
competitive advantage
Strategic Tool, Approach, or Model to Use in the Analysis
-Most strategic management tools used in analyzing the internal environment are intended to evaluate the
business resource strategic factor of a company.

Table 6.5 Internal Environment Strategic Management Tools and Their Objectives

Internal Environment Objective of the Tool Strategic Factor being

Strategic Management Analyzed
Tools
SWOT
SWOT Analysis To assess a company’s The strengths and
Analysis Model
strength and weaknesses weakness of a company
so that opportunities are
exploited and threats are
avoided or minimized
VRIO Framework To identify a company’s The resources of a
resource that is company
considered valuable, rare,
and difficult to imitate and
to assess if the company
is organized to use it to
sustain a competitive
advantage
Value Chain analysis To determine which Business activities
model activities create value and
which create cost so that
the profit margin is
improved and competitive
advantage is achieved
BCG Growth-Share To determine the status of The product portfolio
matrix model a company’s unit of
product portfolio in terms
of market share and
growth
l Strengths, weaknesses, opportunities and threats
l Evaluates the internal strengths and weaknesses of a company against what the external opportunities
and threats offer.
l The objective of this analysis is to assess a company’s strengths and weaknesses to exploit external
opportunities and avoid possible threats.
l More useful if applied together with the PESTEL Analysis and Porter’s five forces of competition model
because most of the data needed in a SWOT Analysis comes from the PESTEL Analysis.
l Only the important SWOT Factors are included
l The analysis starts with the identification of the external factors (e.g., opportunities and threats), followed
by the assessment of the internal factors (e.g., strengths and weaknesses).

Steps to be observed when conducting a SWOT Analysis:

1. Identify external opportunities and threats.
2. Assess the internal strengths and weaknesses of a company.
3. Rank them according to their importance, impact on, and risk to the company.
4. Select the factors that are ranked first and second.
5. Define the most appropriate strategies.
TOWS Matrix- developed by Heinz Welrich, a variant of the SWOT Model.

Table 6.6 The TOWS Matrix

Internal Factors Strengths (S) Weaknesses (W)

External Factors
S1 W1
S2 W2
Opportunities (O) S-O Strategies W-O Strategies

O1 (How to use strengths to (How to overcome

O2 exploit or benefit from weaknesses by taking
opportunities) advantage of
opportunities)
Threats (T) S-T Strategies W-T Strategies

T1 (How to use strengths to (How to minimize

T2 avoid or minimize threats) weaknesses to avoid
threats)

SWOT Factors:
1. Strengths
A. Resources
B. Core competencies
C. Strong market position
D. Managerial and employee skills
E. Product and service quality

2. Weaknesses
A. Weak finances
B. Poor quality reputation
C. Employee skill gap
D. Poor managerial skills
E. Undifferentiated product or service

3. Opportunities
A. High economic growth
B. Weak competitors
C. Positive change in the political environment
D. New technological developments
E. New markets

4. Threats
A. Economic slowdown
B. Intense competition
C. Negative change in the environment
D. Global warming
E. Technological threat

VRIO Framework
l Value, Rareness, Imitability, and Organization
l A strategic management tool that assesses the resources of a company to achieve competitive advantage.
l Valuable- if it can add value for the customer and if it provides a company the capability to exploit
opportunities or defend against threats.
l Rare- if only a few companies possess it.
l Hardly be imitated or costly to imitate- considered not imitable.
l Organized- activities of different functional units, systems, processes, and structures are coordinated,
planned, and arranged properly.
l The objective of this framework is to determine a company’s resources that are valuable, rare, and not
imitable and if the company is organized to use them to achieve conmpetitive advantage.
l However, it is not easy to identify a resource that is within the VRIO requirements.
l Helpful to complement this with the SWOT analysis model and Value Chain analysis.
l Uses data obtained mostly from internal sources.

The analysis starts by assessing whether a resource is valuable. If it is not valuable, it will no longer be
tested again the other criteria. However, when the resource is judged valuable, it will be assessed according to
its rareness. If it not rare, it will no longer be tested against the other criteria. This evaluation continues until the
resource has been tested against the last criterion.

Table 6.7 VRIO Analysis Template

Resources Data Valuable Rare Not Organiz Effect on the

and Imitable ed Firm
their
Sources
VALUE Physical No Competitive
CHAIN resources disadvantage
ANALYSIS Human Yes No Competitive
MODEL resources parity
Financial Yes Yes No Temporary
resources competitive
advantage
Technological Yes Yes Yes No Unused
resources competitive
advantage
Organizational Yes Yes Yes Yes Sustained
resources competitive
advantage
l Developed by Michael Porter
l A strategic management tool that evaluates the internal activities of a company when producing goods or
delivering services.
l This model groups business activities into primary and support activities:
n Primary activities - include inbound logistics, operations, outbound logistics, marketing, and service
n Support activities - include company infrastructure, human resource management, product and
technology development, and procurement
l All these activities are directed toward improving a company’s profit margin and attaining competitive
advantage.
The objective of Value Chain Analysis is to:
l Assess which of company’s activities create value and;
l Which create cost in order for the company to improve its profit margin and achieve competitive
advantage
Value represents the benefits that are derived from a product or service.
This benefits must be higher than the cost as this will be measured from the perspective of the
customers.
Competitive Advantage refers to factors that allow a company to produce goods or services better of more
cheaply than its rivals.
A company may aim to achieve cost advantage or differentiation advantage.
l If a company aims to achieve cost advantage, the focus of the analysis is on the activities that create
cost to the company and how they can be reduced.
l If a company aims to achieve differentiation advantage, the focus of the analysis is on the activities
that create value for the customers and how they can be improved.

To use the value chain analysis model, the following steps are to be performed:
1. Identify the different business activities.
a. For a company that aims to achieve cost advantage - the primary and support activities
b. For a company that plans to attain differentiation advantage - the activities that create
customer value
2. Assess the importance of the activities to the cost or value of a product
3. Define the links between the activities
4. Identify the means to reduce cost or differentiate the product

BCG GROWTH-SHARE MATRIX MODEL

l Developed by Bruce Herderson of Biston Consulting Group (BCG) in 1970
l A strategic management model that assesses a company’s business units of products in terms of
market share and market growth.
n Market share - acts as the proxy for competitive advantage
n Market growth - serves as the proxy for industry attractiveness

BCG Growth-share market portfolio

l The product portfolio can be classified into four categories:
n Stars
Ø Characteristics: These are the products that have high market shares and growth rates in
high-growth industries. They are cash generators and cash users.
Ø Strategic Choice: vertical integration, horizontal integration, market penetration, and market
development
n Question marks
Ø Characteristics: These are products that have low market share but consume large amounts
of cash.
Ø Strategic Choice: market penetration, product development, and divestiture
n Cash cows
Ø Characteristics: These are leaders in the mature market that generate steady cash flow but
utilize small amounts only. Excess cash are flowed to question marks.
Ø Strategic Choice: product development and diversification
n Dogs
Ø Characteristics: These are products that have low market shares and growth rates. They
generally consume large amounts of cash.
 Ø Strategic Choice: divestiture, liquidation, and retrenchment

When conducting an analysis using the BCG growth-share matrix model, the following steps are to be
observed:
1. Define the market share where the products of a strategic business unit (SBU) belong.
2. Gather information about business revenue, business market share, competitor’s market share, and
market or industry growth rate.
3. Compute for the relative market share
4. Define the possible strategic alternatives.

The relative market share is computed based on the market share of the largest competitor as follows: