Strategic Analysis

JOMOKENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY

MASTER OF BUSINESS ADMINISTRATION

STRATEGIC MANAGEMENT ASSIGNMENT

PARTICIPANTS:
ELIJAH MUSYIMI
HD 233/C0022//2015
AGNESS MUENI
HD 233/C0022//2015
REDEMPTA MUTUA HD 233/C0022/3678/2015

TASK:EXTERNAL AND INTERNAL ENVIRONMENT ANALYSIS

CONTENTS
INTRODUCTION TO STRATEGIC ANALYSIS......................................................................2
EXTERNAL ENVIRONMENT...................................................................................................2
a)

SWOT Analysis...................................................................................................................2

b) PESTLE Analysis................................................................................................................3
c)

Porter’s five forces of competition.....................................................................................4

INTERNAL ANALYSIS................................................................................................................5
Value Chain Analysis/ Value Proposition Resource Model....................................................6
Strategic Internal Factors.........................................................................................................9

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INTRODUCTION TO STRATEGIC ANALYSIS
Strategy refers to the plans made and action taken to enable an organization to fulfill its indented
objectives.
Strategy is management’s game plan for strengthening the organization’s position, pleasing
customers, and achieving performance targets.

Analysis can be divided into two categories;
 external
 Internal analysis.
EXTERNAL ENVIRONMENT
The analysis entails assessing the level of threat or opportunity the factors might present. These
evaluations are later translated into the decision-making process. The analysis helps align
strategies with the firm’s environment.
The external environment can be divided into;
1. Macro-environmental analysis
Macro level analysis deals with the external environment of the organization, global issues that
affect the business not only in this particular organization but the whole industry.
2. Micro-environmental analysis
The micro level examines the organization’s own factors that influence its operation, customers
and competitors.
Our market is facing changes every day. Many new things develop over time and the whole
scenario can alter in only a few seconds. There are some factors that are beyond your control.
But, you can control a lot of these things.
Businesses are greatly influenced by their environment. All the situational factors which
determine day to day circumstances impact firms. So, businesses must constantly analyze the
trade environment and the market.
This is accomplished by scanning, monitoring, forecasting, and assessing. It helps ensure that
genuinely important opportunities and threats in the external environment are not overlooked.
Internal analysis takes place in successively detailed stages of surveying, categorizing,
investigating, and evaluating.
Some of the frameworks applied in scanning the business environment are
 SWOT Analysis
 PESTLE Analysis
 Michael Porter’s five forces of competition
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a) SWOT Analysis
SWOT analysis is an examination of an organization’s internal strengths and weaknesses, its
opportunities for growth and improvement, and the threats the external environment presents to
its survival.
Environmental factors internal to the firm usually can be classified as strengths (S) or
weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats
(T).
The SWOT analysis provides information that is helpful in matching the firm's resources and
capabilities to the competitive environment in which it operates.

Strength
Refers to a core competency of your business where your business has a competitive advantage
when it comes to customer value propositions. For instance, your business scored higher than
your competitor's in terms of market share.
Weakness
Refers to a core competency of one’s business where your competitor has a competitive
advantage when it comes to customer value propositions. For instance, your business scored
lower than your competitor's.
Opportunities
Represent significant new business initiatives available to the organization e.g new market
segment.
Threats
Threats are factors that could negatively affect organizational performance. Examples include
political or economic instability; increasing demand by patients.

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b) PESTLE Analysis
PESTLE analysis consists of various factors that affect the business environment. Each letter in
the acronym signifies a set of factors. These factors can affect every industry directly or
indirectly.
The letters in PESTLE, also called PESTEL, denote the following things:

Political factors

Economic factors

Social factors

Technological factors

Legal factors

Environmental factor
It gives an overview of the different macro environmental factors that organization takes into
consideration. Managers should also examine how each factor impacts the organization’s internal
parts, the markets and the industry in which the organization is competing. (Evans et al. 2003).
POLITICAL FACTORS
The political factors take the country’s current political situation. It also reads the global political
condition’s effect on the country and business. When conducting this step, ask questions like
“What kind of government leadership is impacting decisions of the firm?”
Some political factors include;





Government policies
Taxes laws and tariff
Stability of government
Entry mode regulations

ECONOMICAL FACTORS
These factors have major impacts on how businesses operate and make decisions. They include
economic growth, interest rates, exchange rates and the inflation rate. Social-cultural factors;
Trends in social factors affect the demand for a company's products and how that company
operates. This includes the cultural aspects, health consciousness, population growth rate, age
distribution, career attitudes and emphasis on safety. For example, an aging population may
imply a smaller and less-willing workforce thus increasing the cost of labour). Furthermore,
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companies may change various management strategies to adapt to these social trends (such as
recruiting older workers).This economic factors include:

The inflation rate

The interest rate

Disposable income of buyers

Credit accessibility

Unemployment rates

The monetary or fiscal policies

The foreign exchange rate
TECHNOLOGICAL FACTORS
Technological factors can determine barriers to entry, minimum efficient production level and
influence outsourcing decisions. They include technological aspects such as R&D activity,
automation, technology incentives and the rate of technological change.
Furthermore, technological shifts can affect costs, quality, and lead to innovation.
c) Porter’s five forces of competition
Microenvironment usually consists of the influences within the organization’s industry. It may
have some influence on it, depending on the level of the business. Mostly this environment
consists of the customers, competitors and suppliers. Michael Porter defined it as a group of
businesses whose products are very similar. The organization must be able to analyze its
competitive environment so as to be able to make a good strategy. This will help it know more
about its customers, find new markets, identify possible threats from known competitors but also
discover new ones and know its resource markets.
Porter’s five forces of competition

1. Supplier power. An assessment of how easy it is for suppliers to drive
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

up prices. This is driven by:
the number of suppliers of each essential input



the uniqueness of their product or service



the relative size and strength of the supplier



the cost of switching from one supplier to another.

2. Buyer power. An assessment of how easy it is for buyers to drive
prices down. This is driven by:
 the number of buyers in the market


the importance of each individual buyer to the organisation



the cost to the buyer of switching from one supplier to another.

If a business has just a few powerful buyers, they are often able to dictate terms.
3. Competitive rivalry. The key driver is the number and capability of
competitors in the market. Many competitors, offering undifferentiated
products and services, will reduce market attractiveness.
4. Threat of substitution. Where close substitute products exist in a market, it
increases the likelihood of customers switching to alternatives in response to
price increases. This reduces both the power of suppliers and the attractiveness
of the market.
5. Threat of new entry. Profitable markets attract new entrants, which erodes
profitability. Unless incumbents have strong and durable barriers to entry, for
example, patents, economies of scale, capital requirements or government
policies, then profitability will decline to a competitive rate.
COMPETITIVE ANALYSIS

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Competitor analysis in strategic is an assessment of the strengths and weaknesses of current and
potential competitors. This analysis provides both an offensive and defensive strategic context to
identify opportunities and threats. Profiling coalesces all of the relevant sources of competitor
analysis into one framework in the support of efficient and effective strategy formulation,
implementation, monitoring and adjustment Competitor analysis is an essential component of
corporate strategy.

Sources of competitor analysis information;
Recorded data: this is easily available in published form either internally or externally. Good
examples include competitor annual reports and product brochures;
Observable data: this has to be actively sought and often assembled from several sources. A
good example is competitor pricing;
Opportunistic data: to get hold of this kind of data requires a lot of planning and organization.
Much of it is “anecdotal”, coming from discussions with suppliers, customers and, perhaps,
previous management of competitors.
TYPES OF COMPETITORS YOUR BUSINESS WILL FACE.
Direct competitors are businesses that are offering identical or similar products or services as
your business. These are companies that customers can easily buy from instead of from you, so
these companies represent your most intense competition
Indirect competitors are businesses that are offering products and services that are close
substitutes. These competitors are probably targeting your markets with a same or similar value
proposition, but delivering a different product.
Future competitors are existing companies that are not yet in the marketplace that you intend to
occupy, Identifying all existing and potential sources of competition is an impossible task,
indirect and future competitors can number in the tens, hundreds, or even thousands. Instead, you
will have to draw the line somewhere when it comes to identifying major competitors -- the ones
that are going to have a real impact on your business over time.
The most common sources of future competitor are:


Companies competing in a related product/market
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

Companies using related technologies



Companies already targeting your prime market segment but with unrelated products



Companies from other geographical areas and with similar products



New start-up companies organized by former employees and/or managers of existing
companies

The entrance of new competitors is likely when:


There are high profit margins in the industry



There is unmet demand (insufficient supply) in the industry



There are no major barriers to entry



There is future growth potential



Competitive rivalry is not intense

Competitor analysis is a critical part of a firm's activities. It is an assessment of the strengths and
weaknesses of current and potential competitors, which may encompass firms not only in their
own sectors but also in other sectors. Directly or indirectly, competitor analysis is a driver of a
firm's strategy and impacts on how firms act or react in their sectors. Gluck, Kaufman and
Walleck (2000) showed that competitor analysis is one of two components that give a firm a
strong market understanding. This drives the formulation of a strategy and it applies whether a
firm formulates a strategy through strategic thinking, formal strategic planning, or opportunistic
strategic decision making. Competitor analysis, together with an understanding of major
environmental trends, is a key input in strategy formulation and should be developed properly.
In utilising competitor analysis as part of strategy formulation, firms are able to adapt or build
their own strategies and be able to compete effectively, improve performance and gain market
share in their businesses. In a large number of instances, firms are able to tap new markets or
build new niches

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MAIN ASPECTS OF COMPETITOR ANALYSIS
The key objectives in competitor analysis are to develop a greater understanding of what
competitors have in place in terms of resources and capabilities, what they plan to do in their
businesses, and how the competitors may react to various situations in reaction to what the firm
does. Michael Porter has defined a competitor analysis framework that focused on four key
aspects competitor's objectives, competitor's assumptions, competitor's strategy, and competitor's
resources and capabilities.
These four aspects of competitor analysis are the areas critical for a firm to understand and they
should pursue this knowledge not only for current competitors but also for other potential
competitors in the business.
The framework is broken into two parts. The competitor's objectives and assumptions drive the
competitor while the competitor's strategy and resources and capabilities define what the
competitor is doing or is capable of doing. Together, these four aspects define a competitor
response profile which gives the firm an understanding of what actions a competitor may take.
Taking this analysis across a firm's key competitors will give the firm a viewpoint on where the
sector is heading, and provides the firm with a basis for developing their strategy and actions.
The key aspects of competitor analysis and the resulting competitor response profile are defined
further below.
Competitor's Objectives
In competitor analysis there are two key factors to note in building knowledge of a competitor's
objectives. The first factor is to know the actual objectives of a competitor. This could range
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from building market share in a specific market or overall business, entering a new market or
even just maintaining profitability. This should also look at not only current competitors but also
potential competitors.
The second factor is to know if the competitor is actually achieving their stated (or sometimes
unstated but implied) objectives. These two factors will provide a firm with an opinion on a
competitor's potential actions to changes in the sector. Firms should identify their key
competitors and be able to define the objectives of each competitor and their likelihood of
achieving their objectives.

Another key aspect in competitor analysis is an understanding of competitors' assumptions about
the overall market (trends in the market, products, and consumers). For example, competitors
could define their actions based on what their assumptions are on the growth of the market. For
a proper competitor analysis work, the assumptions made by competitors on the industry and
other players should be indicated
Competitor's Strategy
A third aspect in competitor analysis is the understanding of a competitor's strategy. In most
cases, this strategy will be defined and stated, particularly for public firms. In other cases, it may
not be openly stated what competitors' strategies are but these can be understood by utilizing a
number of sources available to firms from analyzing annual shareholders reports, interviews with
analyst, statement by managers and press release. However, this stated strategy often differs from
what the competitor actually is doing what a competitor is doing is evident in where its cash flow
is directed such as in the following tangible actions: hiring activity & D projects, capital
investments, promotional campaigns, strategic partnership, mergers and acquisitions.

Competitor's Resources and Capabilities
Competitor analysis should also include an understanding of a competitor's resources and
capabilities as these would give a firm an idea of how a competitor can achieve its strategy and
objectives, and also give a firm a timeline for when it would expect competitors to pursue certain
activities
HOW TO WRITE A GOOD COMPETITOR ANALYSIS
There are several principles to follow in writing a good competitor analysis. These principles
are:


Understand the key aims in pursuing a competitor -competitor analysis can be
pursued with a specific aim in mind. This could be as specific as defining a competitor's
strategy, understanding a firm's competitive advantages versus a particular competitor, or
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just keeping management informed of any recent developments that need to be
highlighted.


Utilize comprehensive sources of information relevant to the particular aim –there is
much information available for carrying out a competitor analysis. The key point is to
ensure that the relevant ones are included for the specific analysis needed.



Analyze the information relative to the firm and also relative to other competitors –
It is important to analyze the information within the context of the sector or the other
players.



Summarise key points of analysis – Finally, instead of including all the information
that's retrieved from various sources, a good competitor analysis would analyse the
information and pull out the key points.

LIMITATION OF COMPETITOR ANALYSIS
The limitations of competitor analysis are linked to the information gathered from various
sources and the interpretation of the information. Also, with the exception of a few information
sources (e.g. patent applications, forecast financial statements), most of the other printed
information shows historical information and may not necessarily give a good indication of a
competitor going forward. This is particularly the case if there are a lot of structural changes
happening in a sector and all players are expected to have dynamic strategies to capture their
market.

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INTERNAL ANALYSIS
What is internal analysis?
 Identification and evaluation of resources (Value), capabilities, and core competencies
 It can be can be completed at corporate or tactical operational level
 Looks at the organization’s
 Current vision
 Mission
 Strategic objectives
 Strategies
Why do an internal analysis?
 It is the only way to identify an organization’s strengths and weaknesses
 It’s needed for making good strategic decisions
Value Chain Analysis/ Value Proposition Resource Model
According to Wheelen and Hunger (2008), the argument behind value chain analysis is that
customers demand value from goods and services they obtain.
What do we mean by Customer value?


That the Product is unique and different
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


That the Product is low priced
That there is Quick response to specific or distinctive customer needs

A value chain is a systematic way of examining organization’s functional activities
The Value Chain

General administration
Technology development
Procurement

Inbound

Operations

Outbound
logistics

Marketing
and sales

Service

Value Chain Analysis
Inbound Logistics
 Materials control system
 Inventory control system
 Raw material handling and warehousing
Operations
 Equipment comparison to competitors
 Plant layout
 Production control system
 Level of automation in production processes
Outbound Logistics
 Timeliness and efficiency of finished products delivery
 Warehousing of finished products
Marketing and Sales
 Marketing research
 Sales promotions and advertising
 Alternative distribution channels
 Competency and motivation of sales force
 Organization’s image of quality
 Organization’s reputation
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


Brand loyalty of customers
Domination of various market segments

Customer Service
 Customer input for product improvements
 Handling of customer complaints
 Warranty and guarantee policies
 Employee training in customer education & service issues
 Replacement parts and services
Procurement
 Alternate sources for obtaining needed resources
 Timeliness of resources procurement
 Procurement of large capital expenditure resources
 Lease-versus-purchase decisions
 Long-term relationships with reliable suppliers
Technological Development
 R&D activities in product and process innovations
 Relationship between R&D and other departments
 Meeting deadlines in technological development activities
 Quality of labs and other research facilities
 Qualifications of lab technicians and scientists
 Creativity and innovation in organizational culture
Human Resource Management
 Recruiting, selecting, orienting, and training employees
 Employee promotion policies
 Reward systems to motivate and challenge employees
 Absenteeism and turnover
 Union-organization relations
 Employee participation in professional organizations
 Employee motivation, job commitment, and satisfaction
Firm Infrastructure
 Identification of external opportunities and threats
 Accomplishing goals with strategic planning system
 Coordination and integration of value chain activities
 Low-cost capital expenditures & working capital funds
 IS support for strategic and operational decisions
 Relationships with stakeholders
 Public image as a responsible corporate citizen
The Analysis Process
 Within the organization's strategic context specify the decisions to be made,
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





Select, gather and analysis the most relevant data about the organization, its environment,
operations and people.
Based on these data, formulate conclusions about the organization its environment,
operations and people.
Determine and appraise feasible alternatives, weighing risks and opportunities.
Select the most appropriate alternative.
Implement the selected alternative and monitor results.

Interrelationships among Value-Chain Activities within and across Organizations

F

P/O

HR

Environmental Inputs 
R&D
Outputs

Environment

Environmental
M

Strategic Internal Factors
MIS
Tangible and Intangible
Tangible
Relatively easy to identify, and include physical and financial assets used to create value for
customers
 Financial resources
 Firm’s cash accounts
 Firm’s capacity to raise equity
 Firm’s borrowing capacity


Physical resources
 Modern plant and facilities
 Favorable manufacturing locations
 State-of-the-art machinery and equipment



Technological resources
 Trade secrets
 Innovative production processes
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 Patents, copyrights, trademarks


Organizational resources
 Effective strategic planning processes
 Excellent evaluation and control systems

Intangible
Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in
unique routines and practices that have evolved over time.
 Innovation and creativity
 Technical and scientific skills
 Innovation capacities
 Reputation
 Effective strategic planning processes
 Excellent evaluation and control systems


Human

 Experience and capabilities of employees
 Trust
 Managerial skills
 Firm-specific practices and procedures
Organizational Capabilities
Competencies or skills that a firm employs to transform inputs to outputs, and capacity to
combine tangible and intangible resources to attain desired end
 Outstanding customer service
 Excellent product development capabilities
 Innovativeness of products and services
 Ability to hire, motivate, and retain human capital
For a strategic capability to be a core competency, it must be
 Valuable
 Rare
 Costly to imitate
 Not substitutable
Is the Resource Valuable?
 Firms resources can be a source of competitive advantage only when they are valuable
 They enable a firm to formulate and implement strategies that improve its efficiency or
effectiveness
Is the Resource Rare?
 Organizational resources also possessed by competitors are not sources of competitive
advantage
 Common strategies based on similar resources give no one firm an advantage
 Competitive advantages are gained only from uncommon resources, resources that are
rare to other competitors
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Can the Resource be imitated?
 Difficulty in imitating resources is key to value creation because it constrains competition
 Profits generated from inimitable resources are more likely to be sustainable
 Physical uniqueness
 Path dependency
 Causal ambiguity
 Social complexity

REFERENCES
Wheleen and Hunger (2008). Strategic Management and Business policy (13th Edition.). Boston:
Pearson
Johnson G., Scholes K & Whittington R. (2008). Exploring Corporate Strategy (8th Edition).
London:Pearson

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