Environmental Analysis

Environmental analysis is a strategic tool. It is a process to identify all the external and internal elements, which can affect the organization's performance. The analysis entails assessing the level of threat or opportunity the factors might present.

Environmental scanning is the acquisition and use of information about events, trends, and relationships in an organization's external environment, the knowledge of which would assist management in planning the organization's future course of action.

SWOT Analysis
This analysis is the name given to the full analysis of internal and external factors that affect an organisation in a given environment. SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats.

Advantage of SWOT

• Easy to understand
• Provides both internal and external views of strategic position
• It is a quick way of generating some key strategic issues
• Most managers are familiar with it
• It is scalable
• Provides a clear structure within which to plan

Disadvantage if SWOT

• Subjective analysis
• Often unprioritised
• No weighting factors
• Ambiguity

PESTLE Analysis
PESTLE analyse the external environment or the firm's macro-environment, including: Political, Economic, Social, Technological, Legal and Ecological

Porter's five forces model
Porter's five forces analysis is a framework that attempts to analyze the level of competition within an industry and business strategy development. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of an Industry.

Threat to entry
This depends on the extent to which there are barriers to entry. Example of barriers:

• Patents
• Economies of scale
• Capital investment
• Distribution channel
• Cost advantage
• Government policy

Bargaining power of buyers

The ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes. The buyer power is high if the buyer has many alternatives. The buyer power is low if they act independently e.g. If a large number of customers will act with each other and ask to make prices low the company will have no other choice because of large number of customers pressure.

Threat of substitutes

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives.

Bargaining power of suppliers

Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm when there are few substitutes.

Rivalry

For most industries the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. Potential factors:

• Sustainable competitive advantage through innovation
• Competition between online and offline companies
• Level of advertising expense
• Powerful competitive strategy
• Firm concentration ratio
• Degree of transparency

Five Forces - Critique

Porter’s model of Five Competitive Forces has been subject of much critique. Its main weakness results from the historical context in which it was developed. In the early eighties, cyclical growth characterized the global economy. Thus, primary corporate objectives consisted of profitability and survival. A major prerequisite for achieving these objectives has been optimization of strategy in relation to the external environment. At that time, development in most industries has been fairly stable and predictable, compared with today’s dynamics.

In general, the meaningfulness of this model is reduced by the following factors:

1. In the economic sense, the model assumes a classic perfect market. The more an industry is regulated, the less meaningful insights the model can deliver.
2. The model is best applicable for analysis of simple market structures. A comprehensive description and analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, by-products and segments. A too narrow focus on particular segments of such industries, however, bears the risk of missing important elements.
3. The model assumes relatively static market structures. This is hardly the case in today’s dynamic markets. Technological breakthroughs and dynamic market entrants from start-ups or other industries may completely change business models, entry barriers and relationships along the supply chain within short times. The Five Forces model may have some use for later analysis of the new situation; but it will hardly provide much meaningful advice for preventive actions.
4. The model is based on the idea of competition. It assumes that companies try to achieve competitive advantages over other players in the markets as well as over suppliers or customers. With this focus, it dos not really take into consideration strategies like strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise-networks or others.

Overall, Porters Five Forces Model has some major limitations in today’s market environment. It is not able to take into account new business models and the dynamics of markets. The value of Porters model is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way – as a starting point for further analysis.


Boston Consulting Group(BCG) Matrix
The BCG matrix is a chart that help Organisations to analyse their business units, that is, their product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis.
It helps to know the market growth and market share of the firm's product.





According to BCG, Products in the portfolio of an organisation is classified into "Question mark", "Star", "Cash cow" and "Dog". And each product will be represented by a circle in the matrix. Each circle represent the size of the business unit in the organisation's portfolio.

And each product will be represented by a circle in the matrix. Each circle represent the size of the business unit in the organisation's portfolio.






The market growth and relative market share of each Strategic Business Units leads to a classification into one of the four categories:

1. Question Marks are low-share Strategic Business Units, but in high-growth markets. To hold their share, not mentioning increasing it which would be desirable, Question Marks require a lot of cash. If Question Marks become a success, they will turn into Stars one day.
2. Stars are high-growth, high-share products or businesses. Those often require heavy investments to finance their rapid growth. Once their growth slows down, which will eventually be the case, Stars will turn into Cash Cows.
3. Cash Cows are low-growth, but high-share products or businesses. They need less investment to hold their market share, being well-established and successful business strategy. Therefore, Cash Cows produce a lot of cash which the company can use to invest in and support other products that need investments to finance their growth, namely Question Marks and Stars.
4. Dogs are low-growth, low-share businesses and products. In other words, Dogs are the least desirable product of a company. They may generate enough cash still to maintain themselves. However, Dogs will not be large sources of cash, and should be phased out as soon as they become unprofitable or as soon as the firm can make better use of its resources to support other products.

Ansoff's matrix



The matrix allows managers to identify different strategic areas in which a business could expand.
It also allows managers to identify the degree of risk associated with each strategies.