Analysis Of The External Macro Environment example essay topic

Date: October 2002 No 1. Give the importance of environment analysis so far a strategy is concerned In this context what is the particular significance of the SWOT analysis? What are the weaknesses of the SWOT and how can they be overcome? Once an organization has specified its objectives, it has to begin with its current situation to devise a strategic plan to reach those objectives. Changes in the external environment often present new opportunities / threats and new ways to reach the objectives. An environmental scan is performed to identify the available opportunities.

The organization must know its own capabilities and limitations in order to select the opportunities that it can pursue with a higher probability of success. The situation analysis therefore involves an analysis of both the external and internal environment. The external environment has two aspects: the macro-environment that affects all firms and a micro-environment that affects only the firms in a particular industry. The macro-environmental analysis includes Political, Economic, Social, and Technological factors and sometimes is referred to as a PEST analysis. Organisation's Environment An important aspect of the micro-environmental analysis is the industry in which the firm operates or is considering operating.

Micro Environment. In order to identify the: O Opportunities and threats within the macro and micro environment. O Strength and weaknesses within the organisation; a SWOT (Strength, Weakness, Opportunities, Threats) analysis is conducted for the organisation. PEST Analysis A PEST analysis is an analysis of the external macro-environment that affects all firms. P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the external macro-environment. Such external factors usually are beyond the firm's control and sometimes present themselves as threats. Factors to be taken into consideration under PEST: Political Analysis.

Political stability. Risk of military invasion. Legal framework for contract enforcement. Intellectual property protection. Trade regulations & tariffs.

Favoured trading partners. Anti-trust laws. Pricing regulations. Taxation - tax rates and incentives. Wage legislation - minimum wage and overtime. Work week.

Mandatory employee benefits. Industrial safety regulations. Product labelling requirements etc Economic Analysis. Type of economic system in countries of operation. Government intervention in the free market.

Comparative advantages of host country. Exchange rates & stability of host country currency. Efficiency of financial markets. Infrastructure quality. Skill level of workforce. Labour costs.

Business cycle stage (e.g. prosperity, recession, recovery). Economic growth rate. Discretionary income. Unemployment rate. Inflation rate. Interest rates etc Social Analysis.

Demographics. Class structure. Education. Culture (gender roles, etc. ). Entrepreneurial spirit.

Attitudes (health, environmental consciousness, etc. ). Leisure interests etc Technological Analysis. Recent technological developments. Technology's impact on product offering. Impact on cost structure.

Impact on value chain structure. Rate of technological diffusion The number of macro-environmental factors is virtually unlimited. In practice, the firm must prioritize and monitor those factors that influence its industry. Even so, it may be difficult to forecast future trends with an acceptable level of accuracy. In this regard, the firm may turn to scenario planning techniques to deal with high levels of uncertainty in important macro-environmental variables... Porter's Five Forces MODEL FOR INDUSTRY ANALYSIS Michael Porter provided a framework that models an industry as being influenced by five forces.

The strategic business manager seeking to develop a competitive advantage over rival firms can use this model to better understand the industry context in which the firm operates. Diagram of Porter's 5 Forces SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry BARRIERS TO ENTRY Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products THREAT OF SUBSTITUTES -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available Buyers' incentives DEGREE OF RIVALRY -Exit barriers -Industry concentration -Fixed costs / Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes Significance of SWOT analysis. It is only after a careful sweep of both the external and internal environment of the firm that management will be able to identify the: O Present and future opportunities and threats in the external environment and O Present and future strengths and weaknesses in its internal environment. Based on this valuable information management of the firm will be in a position to better identify appropriate objectives and strategies which will enable it to achieve its " Mission". This is usually achieved by: O Develop strategies to optimally exploit the opportunities (present and future) By using the present and future strengths of the firm. O Develop strategies to decrease the impact of threats (present and future) or better still to convert a "threat" into an "opportunity" (one must bear in mind that the classification of an event as an opportunity or threat is mainly a subjective one) O Reduce the impact of internal weakness of the firm by taking corrective actions.

Thus if wastage, or low productivity are identified weaknesses, one could look at training as a tool to reduce the impact of such weakness. DRAWBACKS OF SWOT. Many complaints about SWOT's performance seem to be based on misconceptions about its role. Some of these suggest poor analytical skills of some of those involved in strategic planning process, or their poor judgment. Other examples show inadequate amount of information about the company and its external environment. Still other examples document poor quality of information relied upon in some SWOT analyses.

It follows then that it is rather the managers' misconceptions, misapplication of SWOT and less than diligent execution of strategic analysis than the inherent characteristics of the tool, that ought to be blamed for the prevalent industry perception that SWOT generated inputs are rarely sufficiently valid and reliable. SWOT commences from drawing up a list of current company strengths, weaknesses, opportunities and threats. What often gets forgotten, though, is that in order to help generate suitable strategies for a certain period, SWOT needs to revise this original inventory to arrive at one that would reflect accurately enough the anticipated company strengths, weaknesses, opportunities and threats for that period. Neglecting this leads to generating strategies based on the current (or even past), and not the future, as appropriate, situation. If a considerable change in the organization's environment is imminent, strategy selected on the basis of the immediate past situation is very likely to be ill suited to the changed state of environment. Second, simple frameworks as SWOT cannot, of themselves, ensure the necessary rigour of strategic analysis.

To expect otherwise is fallacious. SWOT helps to spell which strengths the organisation should be building its future on, impact of which weaknesses needs to be minimized, what opportunities ought to be seized, and what threats need to counteracted. Third, SWOT is in practice rarely deployed at lower than the corporate level. A typical situation is for SWOT to be done for the corporate level only. This often produces a risk-laden fallacy that each strength and weakness, regardless of scenario, is relevant to and equally significant for all Strategic Business Units (SBUs) and products the company makes or sells. Such fallacy hides differences between situations of various products / services and can often lead to wrong strategies being selected for individual SBUs, product lines, or indeed the entire company.

By producing a single SWOT for one organization level only, companies will deny themselves opportunity to fine tune strategies to the particular requirements of SBUs, product lines, and geographic markets. Fourth, to evaluate the size of its competitive gaps and leads, the company needs to know the relevant performance levels of all its close competitors. Yet, the relevant business practice is often different. Many companies find it too difficult to collect comprehensive, unbiased and up-to-date information on all relevant facets of competitor performance. Sometimes, the difficulties begin at the level of defining who all their close competitors are. Volatility of the competitive environment and differing judgments on factors by various individuals involved in SWOT analysis often aggravate this problem.

Fifth, SWOT inventories are rarely modified for alternative strategy options. All such oversights are quite remarkable in that few would disagree that the meaning and significance of any weakness or strength is strategy-specific. Let us imagine, for instance, a company that has sold organically grown vegetables and fruit of superior appearance and freshness at premium prices accepted by some market niches. If such a company all of a sudden switches to a mass, rather than niche, marketing strategy, its assumed technological strengths are likely to carry, at least for some time, significantly less weight with those of their potential, or actual, consumers who buy largely on price and accept average appearance and freshness.

Sixth, the reference to the current, rather than to the anticipated future, competitors' performance levels is another popular misconception. Some companies are slow to adapt bench trending, rather than benchmarking, as the more accurate, and more appropriate, strategic planning tool. They develop their strategies on the implicit, or arbitrary, assumption that their current strengths and weaknesses will retain their validity and currency throughout the entire period during which new strategies are to be pursued. Such a practice contradicts the very logic that underlies an effective strategy generation: the choice of strategy needs to be based on the anticipated future situation, not on an analysis of the current one. The (perceived) level of difficulty in obtaining a complete, unbiased and up-to-date prediction of all relevant facets of competitive performance could be the main cause of such a neglect. Conclusion: Despite the fact that SWOT does have some inherent drawbacks it still a relatively popular tool available to managers to assess the internal and external environment of their firm.

Some points to be noted before the conduct of a SWOT are the following: O Training should be carried out for those who will be involved in the exercise. This will help them to familiarise themselves with the tool. O The team should consist of not only top management. Even though the strategic direction is provided for at corporate level. This would ensure the most precious "buy-in" on the part of other members of staff who would be responsible for the implementation of the objectives so defined. O Enough time should be provided to carry out the exercise properly.