Unit 2

Environmental Analysis

Introduction

The most significant development that has taken place in India after the
independence is liberalisation. This lead to the establishment of free market
based economy. The result was that most of the companies had to operate in a
competitive market, the market place turned global. This implied that
companies take advantage of opportunities, not only for their growth &
expansion but also for their survival,

Globalisation can transform companies if they fail to adapt the change in

the environment.

Environment refers to all those forces or factors that influence various decision
of the firm. A firms environment consist of internal environment & external
environment, both these environment help to determine the strength, weakness,
opportunity & threat.

Environmental Analysis is a process of identifying the relevant factors that have

a direct or indirect impact on the effective and efficient functioning of the
business. In other words, 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. These evaluations are later translated into the decision-making process.
The analysis helps align strategies with the firm’s environment.

What is an environmental analysis?

An environmental analysis, or environmental scanning, is a strategic tool you

can use to find all internal and external elements that may affect an
organization's performance. Internal components indicate the business's
strengths and weaknesses, while the external components indicate the
opportunities and threats outside the organization. An environment analysis
considers trends and high-level factors, such as interest rates, and how they
might change a company's business. These reviews can help companies assess
market attractiveness and create better strategies for the future.
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.

There are many strategic analysis tools that a firm can use, but some are more
common. The most used detailed analysis of the environment is the PESTLE
analysis. This is a bird’s eye view of the business conduct. Managers and
strategy builders use this analysis to find where their market currently. It also
helps foresee where the organization will be in the future.

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

Often, managers choose to learn about political, economic, social and

technological factors only. In that case, they conduct the PEST analysis. PEST
is also an environmental analysis. It is a shorter version of PESTLE analysis.
STEP, STEEP, STEEPLE, STEEPLED, STEPJE and LEPEST: All of these are
acronyms for the same set of factors. Some of them gauge additional factors like
ethical and demographical factors.

P for 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 that you can study are:

• Government policies
• Taxes laws and tariff

• Stability of government

• Entry mode regulations

E for Economic factors

Economic factors involve all the determinants of the economy and its state.
These are factors that can conclude the direction in which the economy might
move. So, businesses analyze this factor based on the environment. It helps to
set up strategies in line with changes.

I have listed some determinants you can assess to know how economic factors
are affecting your business below:

• The inflation rate

• The interest rate

• Disposable income of buyers

• Credit accessibility

• Unemployment rates

• The monetary or fiscal policies

• The foreign exchange rate

S for Social factors

Countries vary from each other. Every country has a distinctive mindset. These
attitudes have an impact on the businesses. The social factors might ultimately
affect the sales of products and services.

Some of the social factors you should study are:

• The cultural implications

• The gender and connected demographics

• The social lifestyles

• The domestic structures

• Educational levels
• Distribution of Wealth

T for Technological factors

Technology is advancing continuously. The advancement is greatly influencing

businesses. Performing environmental analysis on these factors will help you
stay up to date with the changes. Technology alters every minute. This is why
companies must stay connected all the time. Firms should integrate when
needed. Technological factors will help you know how the consumers react to
various trends.

Firms can use these factors for their benefit:

• New discoveries

• Rate of technological obsolescence

• Rate of technological advances

• Innovative technological platforms

L for Legal factors

Legislative changes take place from time to time. Many of these changes affect
the business environment. If a regulatory body sets up a regulation for
industries, for example, that law would impact industries and business in that
economy. So, businesses should also analyze the legal developments in
respective environments.

I have mentioned some legal factors you need to be aware of:

• Product regulations

• Employment regulations

• Competitive regulations

• Patent infringements

• Health and safety regulations

E for Environmental factors

The location influences business trades. Changes in climatic changes can affect
the trade. The consumer reactions to particular offering can also be an issue.
This most often affects agribusinesses.

Some environmental factors you can study are:

• Geographical location

• The climate and weather

• Waste disposal laws

• Energy consumption regulation

• People’s attitude towards the environment

There are many external factors other than the ones mentioned above. None of
these factors are independent. They rely on each other.

If you are wondering how you can conduct environmental analysis, here are 5
simple steps you could follow:

• Understand all the environmental factors before moving to the next step.

• Collect all the relevant information.

• Identify the opportunities for your organization.

• Recognize the threats your company faces. • The final step is to take
action.

It is true that industry factors have an impact on the company performance.

Environmental analysis is essential to determine what role certain factors play
in your business. PEST or PESTLE analysis allows businesses to take a look at
the external factors. Many organizations use these tools to project the growth of
their company effectively.

Process of Environmental Analysis

Environment analysis is managerial decision-making based on the assessment

of opportunities and threats in the environment. The steps in the environmental
analysis are:

1.Scanning: It involves information gathering for assessing the nature of the

environment in terms of uncertainty, complexity, and dynamics. It includes:
  Identifies early signs of future environmental changes. They are indicated
by trends and events.
 Detects changes already underway. They are happening

2.Monitoring: It involves tracking environmental trends and events. It is the

auditing of the environment. The likely impact of environmental influences on
business performance is identified.

3.Forecasting: This step forecast what is likely to happen. Its layout of the path
to anticipate changes. This step provides:

 Key forces at work in the environment. They can be political-legal,

economic, social, cultural, and technological.
 Understanding of the nature of key influences and drivers of change.
 Projection of future alternative paths available.

4.Assessment: This step identifies key opportunities and threats. The

competitive position of a business is analyzed in terms of how the organization
stands in relation to other organizations competing for some resources of
customers.

 Opportunities are a favorable condition that creates risks and weakens the
competitive position.
 The threat is an unfavorable condition that strengthens, the organization’s
competitive position of the organization.

Steps Involved in Environmental Analysis

1.Identifying: First of all, the factors which influence the business entity are to
be identified, to improve its position in the market. The identification is
performed at various levels, i.e. company level, market level, national level and
global level.

2.Scanning: Scanning implies the process of critically examining the factors

that highly influence the business, as all the factors identified in the previous
step effects the entity with the same intensity. Once the important factors are
identified, strategies can be made for its improvement.

3.Analyzing: In this step, a careful analysis of all the environmental factors is

made to determine their effect on different business levels and on the business
as a whole. Different tools available for the analysis include benchmarking,
Delphi technique and scenario building.

4.Forecasting: After identification, examination and analysis, lastly the impact

of the variables is to be forecasted.

Environmental analysis is an ongoing process and follows a holistic approach

that continuously scans the forces effecting the business environment and
covers 360 degrees of the horizon, rather than a specific segment.

Need for Environmental Analysis

1. Ensure Survival & Success

The ability to deal well with the environment has enabled organisation to
survive and succeed despite certain weakness. Correspondingly some of the best
managed companies expanding vital efforts & resources in the direction not in
tune with a changing environment do face difficulties & even disaster.

A failure to respond to changes in the environment results in the eventual failure

of the organisation no matter how well it might have been operated internally.

2.Facilities Planning

Environmental analysis helps the management to recognise that many products

and services have life cycle, today’s winner may be loser in the course of time
hence the planning for their successors is important, the management can plan
for the resources to produce and market these successors to a receptive
environment.

3. Help to grab Opportunities

Business organisation continuously tunes into the environmental forces that

influence the demand for existing product & service thus creating opportunities
for new one, firms need to identify correctly or to anticipate all the development
that would influence the future so as to be ready for the resulting opportunities.

4. Minimize Threats

A proper environmental analysis not only helps to grab opportunities but also
helps to minimize threats. Farsighted management can anticipate threats from
the environment such as from the technological front and gear them to face the
threats by remaining proactive, it helps a firm to develop an early warning
system to prevent threats or develop strategies which can turn a threat to the
firms advantage .

5. Build Image

Business firms needs to be popular and earn a good name in the society, this is
possible when they not only study the environment and adapt to it but also strive
to make the environment hospitable to the growth of the business.

6. Helps in Innovation

Business firm anticipate A considerable amount of time & effort is devoted to

R&D activities by progressive firms to face the threats/changes in the
environment, such R&D efforts leads to innovation of new or better products &
services.

7.Ecological Balance

Business firms are aware of depletion of resources and pollution of environment

through industrial waste, therefore sound business firms looks for newer
resources or alternate resources they also take adequate measures to minimize
the pollution effect on the environment by recycling waste

8. Optimum Use of Resources

A study of technological development, government policies, demographic

pattern etc will help a business firm to plan its activities & allocate the limited
resources in a better way. A systematic analysis of business environment helps s
business firm to make optimum utilization of limited resources and meet the
ever increasing and changing need of the consumer.

9.Flexibility in Operation

The environmental factors are uncontrollable & a business firms finds it

difficult to influence the surrounding of its choice, a study of environment will
enable a firm to adjust its operation depending upon the changing
environmental situation

10. Help to face Competition

A study of business environment enables a firm to analyze the competitors

strengths and weakness, this would help the firm to incorporate the competitors
strengths in its working and exploit the competitors weakness in its favour this
can be done thru effective production and marketing strategies.

IMPORTANCE OF ENVIRONMENT ANALYSIS

 There are many external factors other than the ones discussed.
 None of these factors are independent.
 They rely on each other.
 It is true that industry factors have an impact on the company
performance.
 Environmental analysis is essential to determine what role certain factors
play in your business.
 PEST or PESTEL analysis allows businesses to take a look at the external
factors.
 Many organizations use these tools to project thegrowth of their
company effectively.
 The analyses provide a good look at factors like revenue, profitability,
and corporate success.

STEPS TO CONDUCT ENVIRONMENT ANALYSIS

 Understand all the environmental factors before moving to the next step.
 Collect all the relevant information.
 Identify the opportunities for the organization.
 Recognize the threats the company faces.
 The final step is to take action.

Components of Business Environment

2 Major Components: Internal Environment and External Environment

Internal Environment:

It refers to all the factors within an organization which affect its functioning.
These factors are generally regarded as controllable i.e. the organization can
alter or modify such factors.

Some of the important internal factors are:

i. Financial Capability: Financial capability factors relate to the availability,

usage and management of funds and all allied aspects that have a bearing on an
organization’s capacity and its ability to implement its strategies.
Some of the important factors which influence the financial capability of any
organization are as follows:

(a) Factors related to the sources of funds like capital structure, procurement of
capital, financing pattern, working capital availability, borrowings, capital and
credit availability, reserves and surplus and relationship with banks and
financial institutions.

(b) Factors related to uses of funds such as capital investment, fixed assets
acquisition, current assets, loans and advances, dividend distribution and
relationship with shareholders.

(c) Factors related to management of funds like financial accounting and

budgeting, management control system, state of financial health, cash, inflation,
credit, return and risk management, cost reduction and control and tax planning
and control.

ii. Marketing Capability: Marketing capability factors relate to the pricing,

promotion and distribution of products or services and all the allied aspects that
have a bearing on an organization’s capacity and ability to implement its
strategies.

Some of these important factors which influence this marketing capability of an

organization are as follows:

(a) Product related factors like variety, differentiation, mixed quality,

positioning packaging, etc.

(b) Price related factors like pricing objectives, policies, changes, protection
advantages, etc.

(c) Promotion related factors like promotional tools, sales promotion,

advertising, public relations etc.

(d) integrative and systematic factors like marketing mix, distribution system,
market standing, company image, marketing organization, marketing system,
marketing management, information system, etc.

iii. Operations Capability: Operations capability factors relate to the

production of the products or services, use of material resources and all allied
aspects that have a bearing on organization’s capacity and ability to implement
its strategies.
Some of the important factors which influence operations capability of an
organization are as follows:

(a) Factors related to the production system like capacity, location, layout,
service, design, work system, degree of automation, extent of vertical
integration, etc.

(b) Factors related to the operation and control system like aggregate production
planning, material supply, inventory, cost and quality control, maintenance
system and procedure, etc.

(c) Factors related to the R & D system like personnel facilities, product
development, patent right, level of technology used, technical collaboration and
support etc.

iv. Personnel Capability: Personnel capability factors relate to the existence

and use of human resources and skills and all allied aspects that have a bearing
of an organization’s capability and capacity to implement its strategies.

Some of the important factors which influence the personnel capability of an

organization are as follows:

(a) Factors related to the personnel system like system for manpower planning
selection, development, compensation, communication and appraisal, position
of the personnel department within the organization, procedures and standards
etc.

(b) Factors related to organization and employee characteristics like corporate

image, quality of managers, staff and workers, perception about the image of
the organization as an employer, availability of developmental opportunities for
employees, working conditions, etc.

(c) Factors related to industrial relations like union – management relationship,

collective bargaining, safety, welfare and security, employee satisfaction and
morale, etc.

v. General Management Capability: General management capability relates

to the integration, coordination and direction of the functional capabilities
towards common goals and all allied aspects that have a bearing on an
organization’s ability to implement its strategies.
Some of the important factors which influence the general management
capability of an organization are as follows:

(a) Factors related to the general management system like strategic management
system, process related to mission, purpose and objective setting, strategy
formulation and implementation machinery, strategy evaluation system,
management information system, corporate planning system, rewards and
incentives system for top managers, etc.

(b) Factors related to general managers like orientations, risk — propensity,

values, norms, personal goals, competence, capacity for work, track record,
balance of functional experience, etc.

External Environment:

The external environment consists of all the factors which provide opportunities
or pose threats to an organization. In a wider sense, the external environment
encompasses a variety of factors like international, national and local economy.
Social changes, demographic variables, political system, technology, attitude
towards business, energy sources, raw materials and other resources and many
other macro level factors make up the external environment.

We could designate such wide perception of the environment as a general

environment. All organizations, in some way or the other, are concerned about
the general environment but the immediate concerns of any organization are
confined just to a part of the general environment which could be termed as a
highly relevant environment and enables the organization to focus its attention
on those factors which are intimately related to its mission, purpose, objects and
strategies.

Depending on its perception of the relevant environment, an organization takes

into account those influences in its surroundings which have an immediate
impact on its strategic management process.

1. Micro Environment: Micro external factors have an important effect on

business operations of a firm. However, all micro factors may not have the same
effect on all firms in the industry. For example, suppliers, an important element
of micro level environment, are often willing to provide the materials at
relatively lower prices to big business firms. They do not have the same attitude
towards relatively small business firms.
Some important micro elements of the business environment are described here:

a)Customer: The prime task for any business is to attract and retain customers.
This is to ensure its own long-term profitability and existence in the market. It
therefore follows that the need and the desire of the customer should be
monitored minutely to ensure customer delight, which will lead to the firm
having an increasing number of loyal customers.

Changing tastes and preferences of the customer should not only be observed as
they happen, but forecasted before, and necessary corrections should be made in
the product/service profile by the company. Customers are the backbone of a
company and the very reason for the company’s existence.

b) Products: Product factors such as the demand, image, features, utility,

function, design, life cycle, price, promotion, distribution, differentiation and
availability of substitutes of products or services also form an intimate part of
the business environment. The product/service features are the key to
attract/retain customers.

c) Marketing Intermediary: This includes all those who facilitate distribution

of goods from the centres of production to the various centres of consumption.
These are the middlemen who form part of the distribution channel and those
who help reach the product/service to the ultimate consumer. They can be few
or many in number, depending on the length of the distribution chain and type
of distribution system that the company adopts. If this chain is hassle free and
functions without many hurdles, it eventually helps the organisation.

d) Competitors: The world has become a global market. There exists

tremendous competition in each and every area. There are other business
entities that manufacture similar products and compete with a company for
market share and turnover. These have to be managed well and market
intelligence is required to find out about their future plans. These can play a
major role in making or marring the fortunes of any company.

e) Suppliers: An important factor in the micro environment is the supplier, i.e.,

those who supply raw materials and components and machines to the company.
The suppliers should be reliable and act as business partners, working in
coordination to fulfil the ultimate consumer expectations. If the suppliers are
reliable, there is no need to keep heavy inventory stocks that increases the risk
of obsolescence and damage and also blocks to working capital of the company.
2. Macro Environment : The macro environment consists of the economic
and non- economic variables that provide opportunities and threats to firms.
This is largely uncontrollable and, therefore, firms adjust their operations to
these environmental factors.

The macro-environment consists of the following:

a)Economic Environment: The economic environment consists of economic

forces that affect business activities. Industrial production, agriculture,
infrastructure, national income, per capita income, money supply, price level,
monetary and fiscal policies, population, business cycles, economic policies,
infrastructural facilities, financial facilities etc. constitute the economic
environment.

The economic environment influences the activities of business enterprises. In

the capitalist economies, firms have the freedom to choose the occupation. The
economic decisions to invest, produce and sell are guided by profit motives. The
factors of production are privately owned and production activities are initiated
by the private entrepreneurs.

b)Non-Economic Environment :It consists of socio-cultural, demographic,

natural, physical, technological, political and legal environment that influence
and are influenced by the economic environment. A large number of variables
affect the non-economic environment.

Some of the important areas of non-economic environment are discussed below:

• Political-legal environment

• Socio-cultural environment

• Technical environment

• Demographic environment

• Natural environment

• International environment

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, be it pharmaceuticals, information
and communication technology, aluminum, or even the beer industry. The
purpose of ICA is to understand factors that influence the performance of the
industry, and as well the performance of firms within the industry.

As the world has witnessed tremendous development in digital technologies,

many industries are in the midst of transitioning from analogue to digital
business model. Digitalization is radically changing what companies produce
and way companies are run. We need a new understanding of industries and a
more advanced set of analytical tools to adapt to these changes. That is why we
have developed our course as ICA 2.0, which will provide an updated picture of
various industries and tools for analyzing them before and after digital
transformation. In this course, we will study theoretical frameworks, examine
evidence from empirical research, and benefit from the experiences shared by
guest speakers.

Industry analysis: external assessment of an organization. From PEST to

PESTEL analysis. Political, economic, sociological, technological,
environmental and legal factors as they impact the organization’s strategic plan.

- Porter´s Five Forces Model.

- Other topics not included by Porter

Porter´s Five Forces

A framework to classify and analyse the factors that determine the profitability
of an industry .

Michael Porter, Harvard Business School (born 1947).

Michael Porter’s main theory is on competition and company strategy. He is

generally recognized as the father of the modern strategy field, and his ideas are
taught in virtually every business school in the world. Other subjects:
competitiveness, economic development, environmental policy and the role of
corporations in society.

Porter’s Five Forces analysis is a framework that helps analyzing the level of
competition within a certain industry. It is especially useful when starting a new
business or when entering a new industry sector. According to this framework,
competitiveness does not only come from competitors. Rather, the state of
competition in an industry depends on five basic forces: threat of new entrants,
bargaining power of suppliers, bargaining power of buyers, threat of substitute
products or services, and existing industry rivalry. The collective strength of
these forces determines the profit potential of an industry and thus its
attractiveness. If the five forces are intense (e.g. airline industry), almost no
company in the industry earns attractive returns on investments. If the forces are
mild however (e.g. softdrink industry), there is room for higher returns. Each
force will be elaborated on below with the aid of examples from the airline
industry to illustrate the usage.

 Three ―horizontal‖ types of competition:

competition from substitutes / from newentrants / from established rivals
 Two ―vertical‖ types of competition:

The bargaining power of suppliers / the bargaining power of buyers.

1.Threat of new entrants

New entrants in an industry bring new capacity and the desire to gain market
share. The seriousness of the threat depends on the barriers to enter a certain
industry. The higher these barriers to entry, the smaller the threat for existing
players. Examples of barriers to entry are the need for economies of scale, high
customer loyalty for existing brands, large capital requirements (e.g. large
investments in marketing or R&D), the need for cumulative experience,
government policies, and limited access to distribution channels. More barriers
can be found in the table below.

2.Threat of substitute products

The existence of products outside of the realm of the common product

boundaries increases the propensity of customers to switch to alternatives. In
order to discover these alternatives one should look beyond similar products
that are branded differently by competitors. Instead, every product that serves a
similar need for customers should be taken into account. Energy drink like
Redbull for instance is usually not considered a competitor of coffee brands
such as Nespresso or Starbucks. However, since both coffee and energy drink
fulfill a similar need (i.e. staying awake/getting energy), customers might be
willing to switch from one to another if they feel that prices increase too much
in either coffee or energy drinks. This will ultimately affect an industry’s
profitability and should therefore also be taken into account when evaluating the
industry’s attractiveness.

3.Rivalry among existing competitors

This last force of the Porter’s Five Forces examines how intense the current
competition is in the marketplace, which is determined by the number of
existing competitors and what each competitor is capable of doing. Rivalry is
high when there are a lot of competitors that are roughly equal in size and
power, when the industry is growing slowly and when consumers can easily
switch to a competitors offering for little cost. A good indicator of competitive
rivalry is the concentration ratio of an industry. The lower this ration, the more
intense rivalry will probably be. When rivalry is high, competitors are likely to
actively engage in advertising and price wars, which can hurt a business’s
bottom line. In addition, rivalry will be more intense when barriers to exit are
high, forcing companies to remain in the industry even though profit margins
are declining. These barriers to exit can for example be long-term loan
agreements and high fixed costs.
4.Bargaining power of suppliers

This force analyzes how much power and control a company’s supplier (also
known as the market of inputs) has over the potential to raise its prices or to
reduce the quality of purchased goods or services, which in turn would lower an
industry’s profitability potential. The concentration of suppliers and the
availability of substitute suppliers are important factors in determining supplier
power. The fewer there are, the more power they have. Businesses are in a
better position when there are a multitude of suppliers. Sources of supplier
power also include the switching costs of companies in the industry, the
presence of available substitutes, the strength of their distribution channels and
the uniqueness or level of differentiation in the product or service the supplier is
delivering.

5.Bargaining power of buyers

The bargaining power of buyers is also described as the market of outputs. This
force analyzes to what extent the customers are able to put the company under
pressure, which also affects the customer’s sensitivity to price changes. The
customers have a lot of power when there aren’t many of them and when the
customers have many alternatives to buy from. Moreover, it should be easy for
them to switch from one company to another. Buying power is low however
when customers purchase products in small amounts, act independently and
when the seller’s product is very different from any of its competitors. The
internet has allowed customers to become more informed and therefore more
empowered. Customers can easily compare prices online, get information about
a wide variety of products and get access to offers from other companies
instantly. Companies can take measures to reduce buyer power by for example
implementing loyalty programs or by differentiating their products and services.

Resources and Capabilities Analysis:

Creating a sustainable formula to stay relevant in the long haul is a major goal
for any organization. The strategy that you develop to achieve this goal
eventually determines your bottom line. To bring this strategy to fruition,
stakeholders and managers need to analyze their resources and capabilities
carefully. After all, these capabilities will drive the quality, innovation,
operational efficiency, and reputation of your business.
After all, these capabilities will drive the quality, innovation, operational
efficiency, and reputation of your business.

However, when you are gauging your workforce’s skills and competencies, you
need to look beyond the quantifiable measures. The qualitative measures
constitute the extensive analysis of resources and their capabilities. This blog
explains the role of this analysis in the formulation of an effective business
strategy. Along with that, the best practices are mentioned to help you do so.

Let’s begin with understanding the basics,

1.The resource and capability matrix

What exactly do we mean by capabilities here? It is simply a collection of the

skills, experience, and qualifications your resources possess. In addition,
capabilities mean what we develop with time to meet the future dynamic
demands. The skills of your resources are the elements that are used to generate
a product or an output.

The onus lies on project managers to balance these skills according to the
organization’s needs. In the end, the competitive advantage that we aim for is
achieved by the right mix of talent. We then assign them to the right jobs and
utilize their skills to the maximum potential.

2.The significance of resource analysis in strategy formulation

As already discussed, the aim of our strategy is to build a sustainable

competitive advantage. Now how does resource analysis help? You analyze and
filter the resources to keep the right amount of skills and competencies at your
firm. This helps you focus on developing a finished, quality product using their
capability.

The products developed by your talent pool drive customers, brand loyalty, and
profitability. Once these aspects are addressed, you are automatically
maintaining your competitive edge. Overall, an extensive resource analysis
defines the success of your business strategy.

3.The VRIN test- Evaluate the competitive advantage of resources

Evaluating the competitive advantage of resources is tedious, hence it’s always

better to have a framework in place.
The VRIN test- an acronym for valuable, rare, inimitable, and non-substitutable
that allows you to build a structured system.

The first two aspects decide if the resource is contributing to organizational

growth. The latter two determine the degree to which the competitive advantage
potential can be sustained.

Let’s understand how these attributes help in decision-making:

•Valuable – If the resources’ skills and work add value to the organization’s
goal and contribute to the competitive advantage.

•Rare – Are the resources and their skills rare to find or widely available among
the competitors? The rarer the resources are to find, the better is a competitive
advantage.

•Inimitable– If your resources’ skills and capabilities are hard and expensive to
imitate, you get a more sustainable competitive advantage.

•Non-substitutable– If your workforce is easily substitutable, you may lose your

competitive advantage sooner if they are.

Note that if the individual resources pass all the four tests, you have a team of
resources who can do so. At the same time, you need to develop those resources
(who do not pass the test) into competitive advantages.

4.Developing Your Resources and Capabilities into Competitive

Advantages

Before you begin the process of developing resources into competitive

advantage, you need to do an extensive analysis to guage who has the
competitive potential.

Assessing the competency and potential of your workforce is the first step of the
analysis. The next is to start taking measures to develop them into a sustainable
competitive advantage and finally appropriate the returns from the sustained
competitive advantage.

Below are three steps for achieving the same and enhancing your bottom line:

• Identify key responsibilities and capabilities

• Leverage transferability
• Replicability

4.1Identify the key resources and capabilities

Gaining complete visibility into your resources’ strengths and weaknesses is the
key to make data-driven decisions and maximize profitability. Once you know
what your resources are capable of, you can use their talent to the maximum
potential.

At the same time, it’s your job to focus on their weaknesses and help them
develop these skills. It will eventually enhance their competitive edge.

4.2Leverage transferability

Transferable or portable skills are competencies that can be utilized for multiple
tasks. They are a great way to ensure that your firm’s competitive advantage is
at its’ sustainable best. Resources are encouraged to develop multiple skills with
the same proficiency.

With the market volatility, comes a wide range of ad hoc project demands.
When your resources can utilize their primary and secondary skills to different
project tasks, they can fulfill these demands at ease. This transferability will
help them deploy their personnel and capabilities at best, regardless of where
they are placed.

4.3Replicability

You may face situations when your resources may not have the capabilities you
are looking for. These capabilities are either expensive to hire or difficult to
replicate. In such cases, you can make an extra effort and build these
capabilities from the ground up. Taking insights from the history and the
previous patterns, you can replicate them to ensure you do justice to your
projects. Your project’s quality is not compromised in this case.

Moreover, organizing training programs to help your resource pool acquire the
niche skills will help you replicate them.

A succession planning and backup strategy for replication must be in place for
the strategic resources with niche skills. This can be accomplished in advance
with knowledge transfer and shadowing and must not be left till the last minute.
These steps will help you keep your competitive advantage at its best in the long
haul. Now, the last, but one of the most important steps to sustain the
competitive advantage is benchmarking.

Here is a brief description of it,

5.Best benchmarking practices

Strategic benchmarking is a practice of comparing and evaluating your

competitor’s data and finding out the internal scope of improvement.

It enables us to gain a competitive advantage in the present and the future as

well. These are some of the best benchmarking practices you can follow:

5.1Exploit key strengths

Deploying the right people to the right job is the key to strategic execution after
the capabilities analysis. These skills will set your firm’s reputation apart from
other competitors.

5.2Managing key weaknesses

Countering your weaknesses is a recipe for disaster. Instead, managing them

smartly and upgrading them will enhance your efficiency and fill the existing
skill gaps.

5.3Appraising resources and capabilities

Reviewing and appraising your talent pool with regular feedback will empower
your decision-making. It will help you reach a consensus on whether you need
to upgrade, enhance, or bring in more talent. These timely checks will keep you
relevant in the long run and sustain your competitive advantage.

Techniques of Environmental Scanning

Different techniques of environmental scanning are described below:

1. Environmental Threat and Opportunity Profile Analysis (ETOP)

ETOP is considered as a useful device that facilitates an assessment of

information related to the environment and also in determining the relative
significance of external environment threats and opportunities to systematically
evaluate environmental scanning. By dividing the environment into different
sections, the ETOP analysis helps in analyzing its impact on the organization.
The analysis is based on threats and opportunities in the environment.

2. Quick Environmental Scanning Technique Analysis (QUEST)

QUEST is an environmental scanning technique that is designed to assist with

organizational strategies by keeping adheres to change and its implications.
Different steps involved in this technique are as follows:

1) The process of environmental scanning starts with the observation of the

organization’s events and trends by strategists.

2) After observation, important issues that may impact the organization are
considered using environment appraisal.

3) A report is created by making a summary of these issues and their impact.

4) In the final step, planners who are responsible for deciding the feasibility of
the proposed strategy, review reports.

3. SWOT Analysis

SWOT analysis stands for strengths, weaknesses, opportunities and threats

analysis of a business environment. Strengths and weaknesses are an
organization’s internal factor while threats and opportunities are considered as
external factors. So, the process of SWOT analysis includes the systematic
analysis of these factors to determine an effective marketing strategy. It is a tool
that is used by the organization for auditing purposes to find its different key
problems and issues.

These are identified through internal and external environmental analysis.

Internal environment analysis/ scanning

Different factors are considered while analyzing the internal environment of an

organization like the structure of the organization, physical location, the
operational capacity and efficiency of the organization, market share, financial
resources, skills and expertise of employees, etc.

Strengths: The strength of any organization is related to its core competencies

i.e. efficient resources or technology or skills or advantages over its
competitors.
For example, the marketing expertise of a firm can be its strength. Apart from
this, an organization’s strength can be:

 Strong customer relations

 Market leader in its product or services
 Sound market image and reputation
 Smooth cash-flows

Weaknesses: A weakness or limitation of an organization is related to the

scarcity of its resources or skill-set of staff or capabilities that creates an adverse
effect on its performance. For example, limited cash-flow and high cost are
considered as a financial weakness of the organization. Similarly, other
weaknesses can be:

 Poor product quality

 Low productivity
 Unrecognized brand name or poor brand image

External environment analysis/scanning

Different factors that are considered while scanning the external environment of
the organization like Competitors, customers, suppliers, technology, social and
economic factors, political and legal issues, market trends, etc.

Opportunities: An opportunity of the organization’s environment is considered

as its most favorable situation. These are the circumstances that are external to
the business and can become an advantage to the organization. For example,
different opportunities for a firm can be:

 Social media marketing

 Mergers & acquisitions
 Tapping new markets
 Expansion in International market
 New product development

Threats: Threats of an organization are current or future unfavorable situations

that may occur in its external environment. For example, below are a few major
threats for a firm:

 A new competitor in the market

 The slow growth of the market
  Changing customer preferences
 Increase in the bargaining power of consumers
 Change in regulations or major technical changes

4. PEST Analysis

PEST technique for a firm’s environmental scanning includes analysis of

political, economic, social, and technical factors of the environment.

a) Political/ Legal factors: Different factors like changes in tax policy,

availability of raw material, etc. creates a direct effect on a business. So
organizations are required to constantly monitor tax-related policy changes as
an increase in tax may increase the heavy financial burden on them. Similarly,
different laws like ―Consumer protection act‖ also play an important role in an
organization’s operation activities as it is important to abide by the act. More
examples can be foreign trade policy, political changes, regulations in
competition, trade restrictions, etc. also considered as different political/ legal
factors that exist in the external business environment.

b) Economic factors: Different economical Factors like the unemployment

rate, inflation, cost of labor, economic trends, disposable income of consumers,
monetary policies, etc. play an important role in environmental scanning. For
example, in the case of high unemployment, a company may decrease the prices
of its products or services and in opposite situation i.e. when the unemployment
rate is low then prices can be high. This happens because if more customers are
unemployed then by lowering the prices, an organization can attract them.

c) Social / Cultural factors: Attitude, trends, and behavioral aspects of society

also create an impact on the functioning of the organization. Studying and
understanding the lifestyle of consumers is very much required to target the
right audience and to offer the right product or services based on their
preferences. For example, Issues and policies related to the environment like
pollution control are also being considered by organizations to ensure that it
operates in an environment-friendly atmosphere. Taking care of the cultural
aspect of different countries while doing business at the international level, is
also an important factor.

d) Technological Factors: Technological factors affect the way firms produce

products and services as well as market them. Like, ―processes based on new
technologies‖ is one of the important factors of a technological environment. To
maximize profits, production should be handled most cost-effectively and this,
technology has an important contribution. For example, an increase in computer
and internet-based technology is playing a major role in the way organizations
are distributing and marketing their products and services. Also, different
advancements in technologies like automation of the manual process and use of
machinery based on more advanced and latest technologies, more investment in
research & development by organizations have increased their efficiency by
increasing production in less time, cost-reduction and better investment in the
long run.