Chapter 3: Environmental Analysis

Question 1

THE BUSINESS ENVIRONMENT: Environment=

Answer 1

• Everything that a firm has NO control over.
• All external factors: may have a positive or negative influence -> analysis required.

Question 2

When analysing environment, distinction between:

Answer 2

• General environment= socio-economic system surrounding the firm
• Competitive environment= part of the environment closest to the firm’s operations

Question 3

Challenging to analyse because environment is uncertain:

Answer 3

• Out of control, complex, dynamic, diverse, hostile
• Because: evolution of economy, acceleration of technological change, political system, etc.

External factors may be opportunities or threats.

Question 4

ANALYSIS OF THE GENERAL ENVIRONMENT

Answer 4

Determines the economy’s wealth and prosperity.

2 approaches to study:

1. the environment’s strategic profile
2. the industrial districts.

Question 5

THE ENVIRONMENT’S STRATEGIC PROFILE

Answer 5

1. Define geographic limit: global, economic area, country, region, city

2. Dimensions of the environment: PESTEL
   
   • Political: government stability, fiscal policy, foreign trade, social welfare policy
   • Economic: cycles, trends in GDP, interest rates, inflation, unemployment, income
   • Socio-cultural: demographics, social unrest, life-style, education, values
   • Technological: new technologies, infrastructure, knowledge protection
   • Ecological: environmental policy, waste treatment, energy consumption
   • Legal: health&safety, product safety, anti-trust legislation, labour legislation

• 2 stages to the PESTEL: the environment’s strategic profile:
  
  • List all the key factors
  • Rating the behaviour of the factors
• But 3 major issues:
  
  • Same characteristics may have different effects on different industries
  • Impact of general environment always different
  • Key factors aren’t always the same: must be identified in each case.

Question 6

INDUSTRIAL DISTRICTS

Answer 6

Industrial district (or cluster) = numerous groups of similar firms and institutions connected by the same economic activity and located in a specific geographic environment.

Question 7

Types of agents in an industrial district:

Answer 7

• Businesses dedicated to the same activity: provide end products and services
• Different types of institutions: public/private, provide specialise technical support
• Businesses located upstream and downstream activities in relation to the main or focus product: like suppliers or distribution firms.
• Business in related industries: provide product that complements main product.

Question 8

Advantages of industrial district:

Answer 8

• Increase in productivity: easy access (suppliers, info, labour, etc.) due to geographical proximity
• Boost for innovation: closeness to research centres means progress faster
• New start-ups: district favours new entries cause lower entry barriers as easy access to human and material resources, and financially possible because greater number of clients due to prior experience of other existing companies.

Question 9

Industrial districts combination of :

Answer 9

combination of competitiveness and cooperation because:

• Generate rivalry in one area in same type of business
• Also generate relationships because located in common environment.

Question 10

ANALYSIS OF THE COMPETITIVE ENVIRONMENT: 4 requirements:

Answer 10

• Define competitive environment
• Define industry’s degree of attractiveness
• Define segments
• Know firm’s rivals.

Question 11

DEFINING THE COMPETITIVE ENVIRONMENT

Answer 11

• Answer the question: who are our competitors?
• Industry= a group of companies offering products or services that are close substitutes of each other.
• So rivals= all those firms who offer substitute

Question 12

DEFINING THE COMPETITIVE ENVIRONMENT: Can be measured by 2 things:

Answer 12

1. Technology: firms that use similar operating processes or raw materials.
2. Market: firms that are manufacturing products that are closely interchangeable.

Question 13

Competitive environment defined based on 3 dimensions:

Answer 13

1. Groups of customers served, or the target
2. Functions of the product/service, the needs
3. Technology used, or how p/s is supplied.

Question 14

3 concepts to define and delimit the competitive environment:

Answer 14

1. Industry: series of firms that, based on a specific technology, seek to attend to all their customer groups and over all possible functions.
2. A firm’s business: the specific selection each firm makes of the functions and customer groups it wishes to cater for.
3. Market: sum of companies that cover the same function for the same group of customers, irrespective of the industry in which they operate.

Question 15

Identification of a firm’s competitors:

Answer 15

• If 1 industry has SAME function for SAME group of customers, and ALL companies define their business the SAME, then easy to find competitive environment
• Or companies can be from SAME industry, but define their business DIFFERENTLY. That means different segments.
• Or companies can be from DIFFERENT industries, but define their business the SAME with SAME function and SAME group of customers.

Question 16

ANALYSIS OF THE INDUSTRY’S STRUCTURE

Answer 16

• Aim: highlight the opportunities and threats.
• Answer the question: how do firms compete in the industry?
• PORTER’s five forces model of industry competition:

Question 17

PORTER’s five forces model of industry competition: used to investigate opportunities and threats:

Answer 17

1. Intensity of rivalry among existing competitors
2. Threat of new entrants
3. Threat of substitute products
4. Bargaining power of suppliers and customers

Question 18

Limitations of PORTER model:

Answer 18

• Static image of competition
• Doesn’t take into account existence of complementary products
• Doesn’t consider existence of other agents: boundary agents (stakeholders that deal with other stakeholders) include public authorities, consumer organisations, ecologists and similar groups, and these groups may have a decisive impact on industry’s performance.
• Not all forces carry the same weight
• Gives too much importance to an industry’s structure when exploiting firm’s performance

Question 19

INDUSTRY SEGMENTATION: STRATEGIC GROUPS

Answer 19

Dividing an industry can be done through:

• Characteristics of products: quality, price, size, presentation, etc.
• Customers: geographic areas, distribution channels, life style, etc.

Or can be done through a supply perspective. PORTER defines them as strategic groups= group of firms in an industry following the same of a similar strategy along the strategic dimensions.

Strategic dimensions include: product line, geographic scope, distribution channels, product quality, pricing policy, customer care, after sales service, etc.

Analysis of strategic groups can be done by selecting 2 significant dimensions and showing them on a map of strategic groups.

Each group has its degree of attractiveness.

Each group has a different set of opportunities and threats, so different expectations for their performance.

Question 20

So according to those expectations, maybe a firm can move from one strategic group to another, but at what cost. Depends on existence of barriers:

Answer 20

• Mobility barriers
• Exit barriers

Question 21

COMPETITOR ANALYSIS

Answer 21

Analysis of competitors explores the behaviour of a firm’s rivals.

Analysis consists of 2 key activities:

1. Gathering data on competitors: public information available on competitors. Competitive Intelligence Systems.
2. Predicting competitors’ behaviour: key is to understand them, and put oneself in their shoes. Grant model:
   
   1. Identification of competitors’ current strategy
   2. Identification of competitors’ objectives
   3. Competitors’ assumptions about the industry
   4. Identification of competitors’ resources and capabilities (financial strength)

Question 22

IMPORTANCE OF ENVIRONMENTAL ANALYSIS FOR FIRM COMPETITIVENESS

Answer 22

Main factors in the general environment with an impact on the competitiveness of firms:

• Country’s network of infrastructure: transport, telecommunications, education, etc.
• Markets’ regulatory framework: goods and services, labour market, etc.
• Public policies: government spending, debt, fiscal, monetary policy, etc.
• Business culture or public opinion on business activities and the behaviour of social agents.

These factors have greater impact on performance levels than those from general environment.

In turbulent environment: prospective measures have to be taken to define factors. Provides global vision for the future.

Analysis of highly changing future environment: scenario method:

• Description of the circumstances, conditions or events that may depict the environment at a future moment in time
• Scenario is more of a teaching and learning instrument that helps to better understand the way the future may unfold.