CHAPTER 2.

ENVIRONMENTAL AND INTERNAL RESOURCE ANALYSIS

NEED FOR ENVIRINMENTAL ANALYSIS

Environment literally means the surroundings external objects, influences
or circumstances under which someone or something exists. The
environment of any organization is “the aggregate of all conditions, events
and influences that surround and affect it.” Since the environment
influences an organization in multitudinous ways, its understanding is of
crucial importance. The concept of environment can be understood by
looking at some of its characteristics which needs to be analyzed for
formulation of business strategy. Environment can be classified into two –
internal and external environment.

The internal environment refers to all factors within an organization that

impact strengths or cause weaknesses of a strategic nature. The external
environment includes all the factors outside the organization which provide
opportunities or pose threats to the organization.

Hence, environmental analysis is a must for formulation of a right strategy

for achievement of the corporate objectives.

Types of Diversification
Diversification is a strategic approach adopting different forms. Depending
on the applied criteria, there are different classifications.

Depending on the direction of company diversification, the different types

are:

Horizontal Diversification
acquiring or developing new products or offering new services that could
appeal to the company´s current customer groups. In this case the company
relies on sales and technological relations to the existing product lines. For
example a dairy, producing cheese adds a new type of cheese to its products.
Vertical Diversification
occurs when the company goes back to previous stages of its production
cycle or moves forward to subsequent stages of the same cycle - production
of raw materials or distribution of the final product. For example, if you have
a company that does reconstruction of houses and offices and you start
selling paints and other construction materials for use in this business. This
kind of diversification may also guarantee a regular supply of materials with
better quality and lower prices.

Concentric Diversification
enlarging the production portfolio by adding new products with the aim of
fully utilising the potential of the existing technologies and marketing
system. The concentric diversification can be a lot more financially efficient
as a strategy, since the business may benefit from some synergies in this
diversification model. It may enforce some investments related to
modernizing or upgrading the existing processes or systems. This type of
diversification is often used by small producers of consumer goods, e.g. a
bakery starts producing pastries or dough products.
Heterogeneous (conglomerate) diversification
is moving to new products or services that have no technological or
commercial relation with current products, equipment, distribution
channels, but which may appeal to new groups of customers. The major
motive behind this kind of diversification is the high return on investments
in the new industry. Furthermore, the decision to go for this kind of
diversification can lead to additional opportunities indirectly related to
further developing the main company business - access to new technologies,
opportunities for strategic partnerships, etc.
 Business decisions are influences by two sets of factors viz internal
factors (the internal environment) and external factors (external environment).

The methods and techniques employed by an organization to monitor the

environment and to gather data to decisive information about the opportunities
and threats that affect their business and the process by which organizations
monitor their environment is known as environmental analysis.

Environmental analysis is defined as the process by which strategic managers

monitor economic, governmental, legal, market, technological, demographic
and social settings to determine opportunities and threats to their firms.

PESTLE ANALYSIS:Key external Variable factors

Political Environment:

Government policies also impact the business climate of a country. The

recent policy of Globalization of the Indian economy, liberalization etc has
created a good climate for private sector investment in the country several
laws are enacted to protect companies from each other by preventing unfair
competition. Some laws are intended to protect workers, consumers and
communities from business firms.

The political atmosphere of the country is significantly relevant to business

organizations. No business can think of expanding a diversifying its activity
if the political atmosphere is unstable and in turmoil.

Economic Environment:

In recent years, the degree of competition in the world has increased

tremendously. Costs controlled are profits earned. Market share of the
competitors, pricing of product general level of profits are factors that affect
a company’s product / service. In analyzing the competitive environment,
it should be the prime concern of the management to find out if there is a
minimum market share of its product in relation to its competitors.

Social environment:

Demographic factors like the size of the population, age composition, sex
composition, educational levels, language, caste, and religion etc are all
factors which are relevant to business. E.g., a rapidly increasing population
indicates a growing demand for many products.

The social changes occur gradually. The social environment consists for
factors related to the consumption habits of the people, customs and
traditions, tastes, preferences. People of varied culture use products in
different ways. E.g.: Rice, wheat, etc are consumed by people by cooking
it in different methods etc. Hence the buying and consumption habits differ
from culture to culture.

Natural Environment:

Geographical and ecological factors such as natural resources weather and

climatic location are all relevant to business. Climate and weather
conditions affect the location of certain industries.
 “PESTLE ANALYSIS”
POLITICAL ECONOMIC
 Regulatory bodies and processes  Home economy situation/Growth
 Government policies  Home economy trends
 Government term and change  Overseas economies and trends
 Trading policies  General taxation issues
 Funding, grants and initiatives  Level of savings
 Home market lobbying/pressure  Industry properties
groups  Taxation specific to
 International pressure groups product/services
 Wars and conflicts/terrorism.  Market and trade cycles
 Specific industry factors
 Market routes and distribution
trends
 Customer/end-user drivers
 Interest and exchange rates

SOCIAL TECHNOLOGICAL
 Lifestyle trends  Competing technology
 Demographics development
 Consumer attitudes and opinions  Research funding
 Media views  Associated/dependent technologies
 Brand, company, technology image  Replacement technology/solutions
 Consumer buying patterns  Maturity of technology
 Fashion and role models  Manufacturing maturity and
 Major events and influences capacity
 Buying access and trends  Information and communications
 Ethnic/religious factors  Consumer buying
 Advertising and publicity mechanisms/technology
 Innovation potential
 Global communications
LEGAL ECOLOGICAL
 Current legislation home market  Weather/climate
 Future legislation  Sustainability?
 International legislation  Ecological/environmental issues
 Law changes affecting social factors  Ethical issues
 Technology legislation
 Technology access, licensing,
patents
 Intellectual property issues
 OPPORTUNITIES AND THREATS
“SWOT ANALYSIS”
SWOT is an acronym for the internal strengths and
weaknesses of business and environmental opportunities and threats
facing that business. SWOT analysis is a systematic identification of the
factors and the strategy that reflects the best match between them. It is
based on the logic that an effective strategy maximizes the business’s
strengths and opportunities but at the same time minimizes its weaknesses
threats.

Strengths Strength is a resource, skill or other advantage relative to

competitor’s and the needs of the markets and organization serves or
anticipates serving. Strength is a distinctive competence that gives
leadership, and buyer-supplier relations are examples.

Weaknesses A weakness is a limitation or deficiency in resources, skills,

and capabilities that serious impedes effective performance. Facilities,
financial resources, management capabilities, marketing skills and brand
image could be sources of weaknesses. Understanding the key strengths
and weaknesses of an organization in narrowing the choice of alternatives
and selective a strategy. Distinct competence and critical weakness are
identified in relation to key determinants of successes for different market
segments; this provides a useful framework for making the best strategic
choice.

Opportunities An opportunity is a major favorable situation in an

organization’s environment. Identification of a previously over looked
marketing segment, changes in competitive or regulatory circumstances,
technological changes, and improved buyer or supplies relationships could
represent major opportunities

Threats A threat is a major unfavorable situation in an organization’s

environment. The entrance of a new competitor, slow market, growth,
increased bargaining power of key buyers or suppliers, major technological
change, and changing regulations could represent major threats to an
organization’s success.
 STRENGTHS WEAKNESS
 Strong brand image  Poor brand image
 Strong distribution network  Weak distribution network
 Deep product mix  Narrow product mix
 High quality product  Low product quality
OPPORTUNITIES THREATS
 Large and growing market  Fierce international
competition
 Delicensing and import  Prices down, cost of
liberalization production up
 Advantage of a good product  High job attrition(employees
range leaving) rates
 Economic boom  Political instability
 Fast increase in income of  Economic recession
people

S W O T analysis studies important factor that affects the performance of

the company is the forces that constitute the company’s immediate
environment. They include some factors like:

Physical assets and facilities: Like capital equipment production capacity,

technology, logistics etc
R & D and technological capabilities: Like ability to innovate and compete.
Marketing Resources: like brand, image, good distribution network etc.
Financial factors: like financial policies, financial position, capital structure
etc.
Human Resources: like skill, morale, attitude, commitment etc.
Finance:

1.High credit rating 1. Low credit rating

Large amount of internally accrued 2. Poor receivables management
money
Production:

1.State of the art of technology 1. Obsolete technology

2. Strong R & D support 2.No R & D support
3.Efficient inventory management 3. Poor inventory management
Personnel:

1.Qualified and experienced 1.Unqualified & inexperienced

human resource work force
2. Good industrial relations 2. Poor industrial relations
3. Motivated Human resources. 3. Low morale work force.
Organization:

1. Efficient Board of directors 1. Inefficient board of directors

2. Efficient and motivated 2. Conflict between managers.
managers