IDENTIFYING OPPORTUNITIES AND THREATS FROM THE EXTERNAL ENVIRONMENT AS THEY IMPACT ON

ORGANIZATIONS
(The processes by which firms choose, maintain or redirect their strategic positions within ever-changing external
environments)

Environmental Factors in Strategic Planning

For any business to grow and prosper, managers of the business must be able to anticipate, recognize and deal with
change in the internal and external environment. Change is a certainty, and for this reason business managers must
actively engage in a process that identifies change and modifies business activity to take best advantage of change.
That process is strategic planning.

The external environment of an organization are those factors outside the company that affect the company's ability
to function. Some external elements can be manipulated by company marketing, while others require the
organization to make adjustments. Monitor the basic components of your company's external environment, and
keep a close watch at all times.

The external environment plays a critical role in shaping the future of entire industries and those of individual
businesses. To keep the business ahead of the competition, managers must continually adjust their strategies to
reflect the environment in which their businesses operate.

The External Environment

General environment

The external environment is regarded as the primary influence on strategy by proponents of planning: The role of
the strategist is to anticipate and respond to change in the political, economic, social and technological environment.
The acronym ’PESTLE’ is used in marketing and management to cover the business environment, i.e. its political,
economic, socio-cultural, technological, legal and ecological components.

External stakeholders

External stakeholders, such as suppliers, customers, unions and government agencies impact strategic decision-
making. Since firms are dependent on the external environment for resources, legitimacy and the sale of their
products, these external groups have power over the firm, influencing the managers’ decisions.

External Opportunities and Threats

The external environment is even more diverse and complex than the internal environment. There are many
effective models to discuss, measure, and analyze the external environment (such as Porter’s Five Force, SWOT
Analysis, PESTEL framework, etc.). For the sake of this discussion, we will focus on the following general strategic
concerns as they pertain to opportunities and threats:

• Markets (customers): Demographic and socio-cultural considerations, such as who the customers are and
what they believe, are critical to capturing market share. Understanding the needs and preferences of
the markets is essential to providing something that will have a demand.
 • Competition: Knowing who else is competing and how they are strategically poised is also key to success.
Consider the size, market share, branding strategy, quality, and strategy of all competitors to ensure a
given organization can feasibly enter the market.

• Technology: Technological trajectories are also highly relevant to success. Does the manufacturing process
of the product have new technologies which are more efficient? Has a disruptive technology filled the
need that was currently being filled?

• Supplier markets: Suppliers have great power as they control the necessary inputs to an organization’s
operational process. For example, smartphones require rare earth materials; if these materials are
increasingly scarce, the price points will rise.

• Labor markets: Acquiring key talent and satisfying employees (relative to the competition) is critical to
success. This requires an understanding of unions and labor laws in regions of operation.

• The economy: Economic recessions and booms can change spending habits drastically, though not always
as one might expect. While most industries suffer during recession, some industries thrive. It is important
to know which economic factors are opportunities and which are threats.

• The regulatory environment: Environmental regulations, import/export tariffs, corporate taxes, and other
regulatory concerns can poise high costs on an organization. Integrating this into a strategy ensures
feasibility.

While there are many other external considerations one could take into account during the strategic planning
process, this list gives a good outline of what must be considered in order to minimize unexpected threats or missed
opportunities.

External Environmental Analysis

This section outlines the continuous process of external environmental analysis used by companies to understand
their turbulent, complex, and global environments. Companies search for sources of information to reduce the
ambiguity and incompleteness of their environmental data, and several of these sources are described here.

What four activities are involved with external environmental analysis?

1. Scanning - This section discusses the identification of early signals of potential change in the external
environment and aligns them with an organizational context.
2. Monitoring - This section suggests the critical need for companies to be able to define the meaning of
environmental trends and events and the use of stakeholders in this effort.
3. Forecasting - This section introduces the importance of determining how quickly and how likely changes
and trends might be expected to occur within the environment.
4. Assessing - This section presents the objective of specifying the implications to be drawn from the
scanning, monitoring, and forecasting efforts made during external environmental analysis.
Conclusion

In formulating strategic decisions, managers need to consider present and future environmental opportunities and
threats. Entrepreneurs develop a basic business idea with a target customer base. Then they proceed to scan the
environment for opportunities and threats and analyze the results in the light of company's resources and strengths.
This analysis gives the managers the information to decide on the feasibility of the business idea. Oversight in
identifying opportunities or threats can lead to misguided strategic decisions and business failure.

Integrate business functions and identify the organization’s position in relation to the outside environment

A typical business organization may consist of the following main departments or functions:

1. Production
- Undertakes the activities necessary to provide the organization’s products or services. Its
main responsibilities are:
➢ Production planning and scheduling
➢ Control and supervision of the production workforce
➢ Managing product quality
➢ Maintenance of plant equipment
➢ Control of inventory
➢ Deciding the best production methods and factory layout

2. Research and Development

- Concerned with developing new products or processes and improving existing
products/processes.
- R & D activities must be closely coordinated with the organization’s marketing activities to
ensure that the organizations is providing exactly what its customers want in the most
efficient, effective and economical way

3. Purchasing
- Concerned with acquiring goods and services for use by the organization. These will include
for example, raw materials and components for manufacturing and also production
equipment.

4. Marketing
- Concerned with identifying and satisfying customer’s needs at the right price.
- Involves researching what customers want and analyzing how the organization cam satisfy
these wants.

5. Human Resource Management

- The human resource function is concerned with the following:
➢ Recruitment and Selection
➢ Training and development
➢ Employee relations
➢ Grievance procedures and disciplinary matters
➢ Health and safety matters
➢ Redundancy procedures
 6. Accounting and Finance
- The accounting and finance function is concerned with the following:
➢ Financial record keeping of transactions involving monetary inflows or outflows
➢ Preparing financial statements
➢ Payroll administration
➢ Preparing management accounting information and analysis to help managers
to plan, control and make decisions

The influence of external factors

Economic conditions influence revenues in most businesses. Politics, regulations, sociocultural trends also
influence the environment in which the company operates. The solution to organizational integration is a business
model that responds to external changes. One way is through emphasizing continuous growth of internal knowledge
and skills so they keep current with the changing external forces.

Example company: Lumber Company

The company must align its company strategy, culture, staff skills, technology, structure and management
style with its goal of producing lumber in an ecologically sustainable manner. Alignment involves making sure that
each department and employee understands the strategic direction of the company. It also involves educating the
stakeholders why the company is spending money on certain projects and why costs for its products or services are
rising. This involves training employees, using public relations to educate stakeholders and maintaining
communication and verification system.

Industry and Competitive Analysis

Industry and competitive analysis (ICA) is a part of any strategy development in firms and other organizations. It
contains a very practical set of methods to quickly obtain a good grasp of an industry.

“the collection of competitors that produces similar or substitute products or services to a defined market”

Industry segments are formed as the products or services of the industry are targeted to particular subsets of the
general market.

Why Study the Industry?

• To make sure it has desirable characteristics

Best industries to enter are high-growth and profitable, with low barriers to entry

Worst industries to enter are declining, barely profitable, highly competitive and regulated, with higher barriers to
entry

• To be prepared for the way it’s changing

• To understand better how to compete
 The purpose of ICA is to understand factors that impact on the performance of the industry, and as well the
performance of firms within the industry. Moreover, managers use ICA to allocate resources, reach strategic goals
such as market share or profitability, and help their firms improve their position within the industry.

COMPETITIVE ADVANTAGE:
ITS MEANING IN DIFFERENT NATIONAL AND INTERNATIONAL MARKETS AND INDUSTRIES

Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm's cost of creating
it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for
equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of
competitive advantage: cost leadership and differentiation.
-- Michael Porter, Competitive Advantage, 1985, p.3

Competitive Advantage:

• The set of unique features of a company and its products that are perceived by the target market as
significant and superior to the competition.
• Something that places a company or a person above the competition.

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.

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.

Cost and differentiation advantages are known as positional advantages since they describe the firm's position in
the industry as a leader in either cost or differentiation.

A resource based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage
that ultimately results in superior value creation.

The following diagram combines the resource based and positioning views to illustrate the concept of competitive
advantage:
Resources and Capabilities

According to the resource based view, in order to develop a competitive advantage the firm must have resources
and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could
replicate what the firm was doing and any advantage quickly would disappear.

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 knowhow
• Installed customer base
• Reputation of the firm
• Brand equity

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. Such capabilities are embedded in the routines of the
organization and are not easily documented as procedures and thus are difficult for competitors to replicate.

The firm's resources and capabilities together form its distinctive 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.

Cost Advantage and Differentiation Advantage

Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a
differentiated product.

A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central
component of the firm's competitive strategy.

Another important decision is how broad or narrow a market segment to target. Porter formed a matrix using cost
advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic strategies that the
firm can pursue to create and sustain a competitive advantage.

Porter's Generic Strategies

The figure below defines the choices of "generic strategy" a firm can follow.

A firm's relative position within an industry is given by its choice of competitive advantage (cost leadership vs.
differentiation) and its choice of competitive scope.

Competitive scope distinguishes between firms targeting broad industry segments and firms focusing on a narrow
segment. Generic strategies are useful because they characterize strategic positions at the simplest and broadest
level.

Porter maintains that achieving competitive advantage requires a firm to make a choice about the type and scope
of its competitive advantage.
The terms "Cost Focus" and "Differentiation Focus" can be a little confusing, as they could be interpreted as meaning
"a focus on cost" or "a focus on differentiation." Remember that Cost Focus means emphasizing cost-
minimization within a focused market, and Differentiation Focus means pursuing strategic differentiation within a
focused market.

The focus strategy has two variants, cost focus and differentiation focus." In general:

• If a firm is targeting customers in most or all segments of an industry based on offering the lowest price, it
is following a cost leadership strategy;
• If it targets customers in most or all segments based on attributes other than price (e.g., via higher product
quality or service) to command a higher price, it is pursuing a differentiation strategy. It is attempting to
differentiate itself along these dimensions favorably relative to its competition. It seeks to minimize costs
in areas that do not differentiate it, to remain cost competitive; or
• If it is focusing on one or a few segments, it is following a focus strategy. A firm may be attempting to offer
a lower cost in that scope (cost focus) or differentiate itself in that scope (differentiation focus).

SWOT Analysis

SWOT Analysis is a simple but useful framework for analyzing your organization's strengths and weaknesses, and
the opportunities and threats that you face. It helps you focus on your strengths, minimize threats, and take the
greatest possible advantage of opportunities available to you.

It can be used to "kick off" strategy formulation, or in a more sophisticated way as a serious strategy tool. You can
also use it to get an understanding of your competitors, which can give you the insights you need to craft a coherent
and successful competitive position.

When carrying out your analysis, be realistic and rigorous. Apply it at the right level, and supplement it with other
option-generation tools where appropriate.
Strengths and weaknesses are often internal to your organization, while opportunities and threats generally relate
to external factors. For this reason, SWOT is sometimes called Internal-External Analysis and the SWOT Matrix is
sometimes called an IE Matrix.

Strengths
• What advantages does your organization have?
• What do you do better than anyone else?
• What unique or lowest-cost resources can you draw upon that others can't?
• What do people in your market see as your strengths?
• What factors mean that you "get the sale"?

Weaknesses
• What could you improve?
• What should you avoid?
• What are people in your market likely to see as weaknesses?
• What factors lose you sales?

Consider your strengths and weaknesses from both an internal perspective, and from the point of view of your
customers and people in your market.

Opportunities
• What good opportunities can you spot?
• What interesting trends are you aware of?

Useful opportunities can come from such things as:

• Changes in technology and markets on both a broad and narrow scale.
• Changes in government policy related to your field.
• Changes in social patterns, population profiles, lifestyle changes, and so on.
• Local events.

When looking at opportunities and threats, PEST Analysis can help to ensure that you don't overlook external
factors, such as new government regulations, or technological changes in your industry.

Threats
• What obstacles do you face?
• What are your competitors doing?
• Are quality standards or specifications for your job, products or services changing?
• Is changing technology threatening your position?
• Do you have bad debt or cash-flow problems?
• Could any of your weaknesses seriously threaten your business?

When looking at opportunities and threats, PEST Analysis can help to ensure that you don't overlook external
factors, such as new government regulations, or technological changes in your industry.
Example:
A small start-up consultancy might draw up the following SWOT Analysis
Strengths:
-We are able to respond very quickly as we have no red tape, and no need for higher management approval.
-We are able to give really good customer care, as the current small amount of work means we have plenty of time
to devote to customers.
Weaknesses:
-Our company has little market presence or reputation.
-We have a small staff, with a shallow skills base in many areas.
Opportunities:
-Our business sector is expanding, with many future opportunities for success.
-Local government wants to encourage local businesses.
Threats:
-Developments in technology may change this market beyond our ability to adapt.
-A small change in the focus of a large competitor might wipe out any market position we achieve.

As a result of their analysis, the consultancy may decide to specialize in rapid response, good value services to local
businesses and local government.
Marketing would be in selected local publications to get the greatest possible market presence for a set advertising
budget, and the consultancy should keep up-to-date with changes in technology where possible.

ANALYZING INTERNAL ENVIRONMENT AND ESTABLISHING LONG-RANGE OBJECTIVES

ANALYZING INTERNAL ENVIRONMENT

➢ Internal environment- - composed of the elements within the organization, including current employees,
management and especially corporate culture, which defines employee behaviour.
➢ Internal analysis
• Looks at the organization’s
a. Current vision
b. Mission
c. Strategic objectives
d. Strategies
• Identifies and evaluates resources, capabilities and core competencies.
a. Resources
❖ asset (tangible and intangible), competency, process, skill (or knowledge) controlled by the
corporation
❖ Inputs into a firm’s production process
❖ By themselves, resources do not create a strategic advantage for the firm.
1. Tangible Resources – Assets that can be seen and quantified
▪ FINANCIAL RESOURCES - the firm’s capacity to borrow and generate internal funds
▪ ORGANIZATIONAL RESOURCES - formal reporting structures
▪ PHYSICAL RESOURCES - sophistication and location of a firm’s plant and equipment;
distribution facilities; product inventory
2. Intangible Resources – Compared to tangible resources, intangible resources are a superior
source of core competencies
▪ HUMAN RESOURCES - knowledge; trust; skills; collaborative abilities
▪ INNOVATION RESOURCES - scientific capabilities; capacity to innovate
 ▪ REPUTATIONAL RESOURCES - brand name; perceptions of product quality, durability, and
reliability; positive reputation with stakeholders, e.g., suppliers/customers
b. Capabilities-
❖ a corporation’s ability to exploit its resources.
❖ Capacity to deploy resources that have been purposely integrated to achieve a desired end state.
❖ Primary base for the firm’s capabilities is the skills and knowledge of its employees.
❖ Just because the firm has a strong capacity for deploying resources does not mean it has a
competitive advantage.
c. Core competencies-
❖ Resources and capabilities serve as a source of competitive advantage for a firm over its rival.
❖ Not all resources and capabilities are core competencies.
Two Tools Firms Use To Identify And Build Core Competencies:
A. Four Specific Criteria of Sustainable Competitive Advantage that can be used to determine which capabilities
are core competencies
Sustainable Competitive Advantage
❖ Exists only when competitors cannot duplicate a firm’s strategy or when they lack the resources
to attempt imitation
The Four Criteria of Sustainable Competitive Advantage
Capabilities must fulfill four specific criteria in order to be Core Competencies
1. VALUABLE CAPABILITIES
• Help a firm neutralize threats or exploit opportunities
2. RARE CAPABILITIES
• Are not possessed by many others
3. COSTLY-TO-IMITATE CAPABILITIES
• Historical: A unique and a valuable organizational culture or brand name
• Ambiguous cause: The causes and uses of a competence are unclear
• Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and
customers
4. NONSUBSTITUTABLE CAPABILITIES
• No strategic equivalent
• Firm-specific knowledge
• Organizational culture
• Superior execution of the chosen business model
B. Value chain Analysis
❖ Allows the firm to understand the parts of its operations that create value and those that do not
❖ this tool helps select the value-creating competencies that should be maintained, upgraded, or
developed and those that should be outsourced
➢ Why do an Internal Analysis?
• It is the only way to identify an organization’s strengths and weaknesses.
✓ Strengths is something a company is good at doing or a characteristics that gives it an important
capability.
✓ Weaknesses is something a company lacks or does poorly or a condition that places it at a
disadvantage.
• It is needed for making good strategic decision

Establishing Long-Range Objectives

➢ Long range objectives- any goal that has a time frame exceeding one year. Performance goal of an
organization, intended to be achieved over a period of five years or more.
➢ To achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven areas:
1. Profitability
The ability of any firm to operate in the long run depends on attaining an acceptable level of profits.
2. Productivity
 Strategic managers constantly try to increase the productivity of their systems.
3. Competitive Position
One measure of corporate success is relative dominance in the marketplace.
4. Employee Development
Employees value education and training, in part because they lead to increased compensation and job
security.
5. Employee Relations
Whether or not they are bound by union contracts, firms actively seek good employee relations.
6. Technological Leadership
Firms must decide whether to lead or follow in the marketplace.
7. Public Responsibility
Managers recognize their responsibilities to their customers and to society at large.
➢ The five qualities of long-term corporate objectives that make them especially useful to strategic managers.
1. Flexible
Objectives should be adaptable to unforeseen or extraordinary changes in the firm's competitive or
environmental forecasts.
2. Measurable
Objectives must clearly and concretely state what will be achieved and when it will be achieved.
3. Motivating
People are most productive when objectives are set at a motivating level.
4. Suitable
Objectives must be suited to the broad aims of the firm, which are expressed in its mission statement.
5. Understandable
Strategic managers at all levels must understand what is to be achieved.
➢ Balanced Scorecard
- A set of four measures directly linked to a company's strategy: financial performance, customer knowledge,
internal business processes, and learning and growth.
 IDENTIFYING STRATEGIC ALTERNATIVES:

 Corporate Strategy Alternatives:

A stable growth strategy can be characterizes as follows:

1. The organization is satisfied with its past performance and decides to continue to pursue the same similar
objectives.

2. Each year the level of achievement expected is increased by approximately the same percentage.

3. The organization continues to serve its customers with basically the same product or services.

4. Management may not wish to take the risk of greatly modifying its present strategy

5. Change threatens those people who employ previously learned skills when new skills are required.

6. I t also threaten sold positions of influence.

Furthermore, the management of a successful organization quite frequently assumes that strategies that have
proved to be successful in the past will continue to be successful in the future.

 Changes in strategy require changes in resource allocation. Changes in patterns of resource allocation in an
established organization are difficult to achieve and frequently require long periods.

 To-rapid growth can lead to a situation in which the organization scales of operations outpace its
administrative resource. Inefficiencies can quickly occur. The organization may not keep up with or be aware
of changes that may affect is product and market.

 Organizations pursuing a growth strategy can be described as follows:

1. They do not necessarily grow faster than the economy as a whole but do grow faster than the markets in
which their products are sold.

2. They tend to have larger-than –average profit margins.

3. They attempt to postpone or even eliminate the danger of price competition in the industry.

4. They regularly develop new products,new markets,new processes, and new use for old products.

5. Instead of adapting to change in the outside world, they tend to adapt the outside world to themselves by
creating something or a demand for something that did not exist before.
 Ansoff's Matrix

The heuristics for marketing strategies was done decades ago, so there is no need to re-invent the wheel because
the basic principles still apply. Much of the pioneering work is attributed to Igor Ansoff, often called the "father of
strategic management." Ansoff developed a matrix that portrays a firm's ability to grow by way of existing and new
products in existing and new markets.
The matrix articulates four different growth strategies based on four possible product/market combinations:
market penetration, market development, product development and product diversification.

1. Take Market Share

Market penetration is the strategy that requires taking market share from competitors in existing markets using
existing products. This strategy assumes a "zero-sum game" in which the market is flat in terms of growth. Thus,
the only way to grow your business is to take away somebody else's business.

2. New Market Expansion

Market development is Ansoff's strategy to grow the business by expanding into new markets or market segments
with existing products. This strategy is appropriate when the existing market or customer base is saturated and
you've maxed-out in terms of growth potential. Strong regional brands often expand into other regions of the
country, or go international, because they've exhausted growth potential in their home markets. This strategy may
also be appropriate when you've exhausted potential with a certain class of trade, such as supermarkets, but don't
do any business with, say, convenience stores.

3. New Products - Same Market

This strategy is based on growing your business by selling new products in existing markets. For example, you may
enjoy a strong brand name that is well-recognized and trusted by your customers, which is readily transferable to
different products. This strategy is attractive for many firms, because it is a low-risk strategy. Customers already
know who you are and what you stand for. Thus, it's easier to sell to the customers you have than to acquire new
customers.

4. New Products – New Markets

This is the riskiest of Ansoff's strategies, because it involves two untested variables: new products and new
markets. However, it may be an attractive option if it offers the best potential for continued growth. Moreover, it
may be an appropriate strategy when the new opportunity aligns with a firm's core competencies. For example,
CKE Restaurants, owner of successful west coast hamburger chain, Carl' Jr., apparently had no issues with acquiring
successful east coast hamburger chain, Hardee's, and retaining the Hardees' brand name in most east coast
markets even though the menu offerings of Carl's Jr. and Hardee's are virtually identical. CKE's core competency is
operating quick-serve restaurants.

Global Strategy

Global Strategy is a process of expanding and competing in globalized market.

Global Strategy is a shortened term that covers three areas: international, multinational and global strategies.

• International strategy - the organization’s objectives relate primarily to the home market.
• Multinational strategy - the organization is involved in a number of markets beyond its home country.
 • Global strategy - the organization treats the world as largely one market and one source of supply with
little local variation.

Benefits of a global strategy

1. Economies of scope - states that an increase in variety of goods produced results in a decrease in average
cost of production.
2. Economies of scale - focuses on average cost reduction by an increase in volume of a single product.
3. Global brand recognition - the benefit that derives from having a brand that is recognized throughout the
world.
4. Global customer satisfaction - multinational customers who demand the same product, service and quality
at various locations around the world.
5. Emergence of new markets - means greater sales from essentially the same products.

Costs of a global strategy

1. Transport and logistics costs - if manufacturing takes place in one country, then it will be necessary to
transport the finished products to other countries.
2. Communications costs will be higher - standardization of products and services needs to be communicated
to every country. It will also be necessary to monitor and control the result.
3. Management coordination costs - in practice, managers and workers in different countries often need to
be consulted, issues need to be explored and discussed, and local variations in tax and legal issues need to
be addressed.
4. Barriers to trade - taxes and other restrictions on goods and services set by national governments as the
goods cross their national borders.