work place safety

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ORGANISATIONAL ENVIRONMENT; DIAGNOSTIC TOOLS
1.0 Introduction
Changing trends within the business environment affect the performance of organizations and,
therefore, have a bearing on the strategies adopted by organizations (Tsiakkiros, 2002). An
important part of the strategic planning process is to recognize and explicitly state any key
assumptions about what the future may hold. Craig (2011) further observes that to be
successful, a business manager must find a fit between what the business environment wants
and what the firm provides, as well as between what the firm needs and what the environment
can provide.
This paper seeks to discuss internal and external analysis of the business environment. The
paper covers definition of terms including internal and external environment, industry and
industry analysis. It will further provide an in-depth discussion on various models used in
internal and external business analysis.
1.1 Definition of Terms
1.1.1 Strategy
Jones and Hill (2009) define strategy as a set of actions that managers take to increase their
company’s performance relative to rivals. Strickland, Thompson & Gamble (2010) view
strategy as management’s action plan for running the business and conducting operations. It is
all about how management intends to grow the business, build a loyal clientele and outcompete
rivals, how each functional piece of the business for instance, Research and Development,
supply chain activities, production, sales and marketing, distribution, finance and human
resources will be operated and how performance will be boosted. They argue that the heart and
soul of any strategy are the actions and moves in the marketplace that managers are taking to
improve the company’s financial performance, strengthen its long term competitive position
and gain a competitive edge over rivals.
1.1.2 Business Environment
Pearce and Robinson (2011) states that the environment of a company is what gives the
company its means of survival. It creates opportunities and it presents threats to the company.
Although the future can never be predicted perfectly, it is important that entrepreneurs and

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managers try to analyse their environment as carefully as they can in order to anticipate and if
possible influence environmental change (Pearce and Robinson, 2011).
1.1.3 Internal environment
Internal analysis, a component of the strategic planning process, serves to pinpoint the strengths
and weaknesses of the organization. It focuses on reviewing the resources, capabilities and
competencies (Jones and Hill, 2009).
1.1.4 Industry and Market Environment
According to Johnson, Whittington and Scholes (2011), an industry can be defined as a group
of companies offering products or services that are close substitutes for each other, that is,
products or services that satisfy the same basic customer needs. A company’s market consists
of close competitors and its rivals that serve the same basic customer needs.
1.1.5 External Environment
The external environment in an organization context refers to conditions, entities, events, and
factors surrounding an organization that influence its activities and choices and determine its
opportunities and risks. Jones and Hill (2010) argue that a macro-environment is the boarder
economic, global, technological, demographic, social and political context in which an industry
is embedded.
1.1.6 Environmental Scanning/Analysis
Environmental scanning is the acquisition and use of information about events, trends, and
relationships in an organization's environment, the knowledge of which would assist
management in planning the organization's future course of action (Aguilar, 1967).
2.0 Why Environmental Analysis?
Strickland et al. (2010) argue that insightful analysis of a company’s external and internal
environment is a prerequisite for crafting a strategy that is an excellent fit with the company’s
situation, is capable of building competitive advantage, and holds good prospect for boosting
company performance.
Johnson et al. (2011) suggest that companies in nearly all industries have to craft strategies that
are responsive to environmental regulations. Happenings in the macro-environment may occur

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rapidly or slowly, with or without advance warning. The impact of these factors on a company’s
choice of strategy can range from big to small.
Environmental analysis helps a firm to identify what is going on in the environment in which
it operates and take advantage of the opportunities and develop actions to mitigate threats
(Mullins, 2010).
2.1 Internal Analysis
Pearce & Robinson (2011) state that internal analysis is performed to determine the
characteristics of the organization and its potential to realize and exploit the market
opportunities. They further argue that Managers also perform internal analysis as part of the
strategy process. The purpose of the internal analysis is to support the decision making process
by determining whether the company’s goals and strategies are feasible for the organization
and whether the design of the organization should be modified to adapt to the company’s
strategy. The big question usually is whether the company’s goals make the best match between
the abilities of the organization and the market opportunities. This determines if the
organization is able to implement the required strategies to attain the company’s goals.
Strickland et al. (2010) observes that internal analysis examines the company’s organizational
structure, performance, abilities, and resources.
2.2 External Analysis
According to Hitt, Ireland, Hoskisson (2001), external analysis is a continuous process which
includes scanning for early signals of potential changes and trends in the general environment.
Strickland et al. (2010) contends that insightful analysis of a company’s external and internal
environment is a prerequisite for crafting a strategy that is an excellent fit with the company’s
situation, is capable of building competitive advantage, and hold good prospect for boosting
company performance.
The External analysis entails five main components which include scanning, monitoring,
forecasting, assessing and competitive intelligence (Hitt et al. 2001).

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Table 1: Components of External Analysis
Component Application
Scanning Identifies early signals of environmental changes and trends
Monitoring Detects meaning through ongoing observations of
environmental changes and trends
Forecasting Develops projections of anticipated outcomes based on
monitored changes and trends
Assessing Determines the timing and importance of environmental
changes and trends for firms’ strategies and their
management
Competitive Intelligence Follows actions of competitors
Source: Hitt et al. (2001)
3.0 Environmental Analysis Models and Perspectives
3.1 SWOT Analysis
SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. According to
Mullins (2010), the strengths and weaknesses are internal to an organization while
opportunities and threats are external.
SWOT is a widely used tool for analyzing internal and external environments to attain a
systematic understanding of a strategic situation (Wheelen and Hunger, 1995; Kotler, 1988).
The philosophy behind the SWOT analysis is that the strategies an organization adopts should
match the environmental threats and opportunities with the organization’s weaknesses and
especially its strengths. This thinking has widely been accepted as a fundamental principle
underlying modern strategic management (Beer et al., 2005). Its philosophy can be traced back
to Sun Tzu’s The Art of War, “Know your enemy, and know yourself, you can fight a hundred
battles with no danger of defeat” (Sun Tzu, 1980).
Practical Application of the Model
The following are some of the proposed guiding questions in the practical application of the
SWOT analysis model (Wheelen and Hunger, 1995; Kotler, 1988 & Mullins, 2010).

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1. Strengths
i. What is golden about your Organization?
 What do you do well (in ministry, in service, in marketing, operations, and
management)?
 What are your assets?
 What are your core competencies?
 What experience do you have?
2. Weaknesses
 What looks a bit rusty inside your Organization?
 What do you need (customer service, marketing, accounting, planning)?
 Where do you lack resources?
 What can you do better?
 Where are you loosing money?
3. Opportunities
 Where is the blue sky in your environment?
 What new needs of your Organization could you meet?
 What are the economic trends that can benefit you?
 What community involvement can you get involved in?
 What are the technological breakthroughs to help you reach your audience?
4. Threats
 Where are the red alerts in your environment?
 What are the negative economic trends?
 What are the negative political and social trends?
 What poses a threat in stopping you to reach your target market??
 What is holding you back from exploding in growth?
 Where are you vulnerable?
3.2 Internal Environment Analysis Models and Perspectives
3.2.1 Resources Based View (RBV)
According to Barney (1991) the resource based view focuses on the internal resources,
capabilities and core competencies of the organisation, and advocates building strategies on

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these foundations to assure the competitiveness of the organisation and the attractiveness of
the industrial sector. Barney further developed the resource-based view arguing that a resource
was strategic if it satisfied the criteria of valuability (the capacity to increase the organisations
effectiveness and efficiency), rarity (rare and in high demand), inimitability (difficult to
imitate) and substitutability (not readily substituted). Likewise the competency-based view
identifies an organization’s competencies as the foundation for strategy development.
The resource based perspectives distinguishes firms in terms of their strategic and resource
endowments and stresses the uniqueness of every firm. This approach assumes that a firm can
use superior resources and capabilities to modify the industry structure and or change the rules
of the competitive game (Wernerfelt, 1984; Peteraf, 1993). According to Stalk, Evans and
Shulman (1992) the key to success is no longer where a company chooses to compete but how
the firm’s unique resources and capabilities dictate strategy and lead to success.
RBV starts with delineation of three basic types of resources:
i. Tangible Resources; These are often found in the firm’s balance sheet and they include
production facilities, raw materials, financial resources, real estate, and computers. These
are the physical and financial assets that a firm uses to provide value to its customers.
ii. Intangible Resources; Such resources include brand names, company reputation,
organizational morale, technical knowledge, patents and trademarks and accumulated
experience within the organization. Such are very critical in creating a competitive edge.
iii. Organizational capabilities; Day (1994) define capabilities as a complex bundle of skills
and collective learning, exercised through organizational processes that ensure superior
coordination of functional activities. Capabilities are about the firm’s ability to integrate
different tangible and intangible resources in order to provide product or services to
customers that are valued.
Practical Application of Model
Day (1994) proposes that practical application of the RBV model in internal environment
analysis involves the following:
1. Disaggregate resources – define the various resources that a firm possesses and break
them down into specific broad categorizations. For example marketing skills can be divided

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into advertising which in turn can be subdivided into national advertising, local promotions
and coupons and this allows for a more measurable assessment.
2. Utilize a functional perspective – Looking at different functional areas of a firm
disintegrating tangible and intangible resource as well as the organizational capabilities that
are present to uncover important value building resources and activities that deserve further
analysis.
3. Look at the organizational processes – This involves taking a creative look at what are
the competences the firm possesses or has the potential to possess that might generate
competitive advantage.
4. Use the value chain approach – this will help to uncover the capabilities, activities and
processes that are valuable potential sources of competitive advantage.
He goes further to say that once the resources are identified apply RBV guidelines to determine
which of those resources represents strengths or weaknesses and which resources develop the
core competencies that are sources of sustainable competitive advantage. The four RBV
guidelines are;
1. Criticality – Is the resource critical to be able to meet the customer’s needs better than
other alternatives?
2. Scarcity & Substitutability – Is the resource scarce? Is it in short supply or not easily
substituted for or imitated?
3. Appropriability – Does the resource drive a key portion of overall profits in a manner
controlled by the firm? Who actually gets the profit created by the resource?
4. Durability or sustainability over time – how rapidly will the resource depreciate?
3.2.2 Value Chain Analysis (VCA)
According Porter (1980), value chain looks at a business as a chain of activities that transform
inputs into outputs. He continues to state that customer’s value derives from three basic
sources: activities that differentiate the product, activities that lower its cost and activities that
meet the customer’s needs quickly.
Pearce and Robinson (2011), observe that value chain analysis (VCA) attempts to understand
how a business creates customers value by examining the contributions of different activities
within the business to value. It takes a process point of view. It disintegrates the business to
sets of activities that occur within the business, starting with the inputs a firm receives and

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finishing with the firms product (or services) and after sales service to customers. VCA
attempts to look at its cost across the series of activities the business performs to determine
where low–cost advantages or disadvantages exist.
Fig 1: Value Chain Analysis Source: Pearce and Robinson (2011)
Porter, 1980; Pearce and Robinson, 2011 explain the different VCA activities (Primary and
support) as follows;
Primary activities: These are the activities in the firm involved in the physical creation of the
product, marketing and transfer to the buyer and after sales support. The primary activities are:
i) In bound logistics: Activities costs and assets associated with obtaining fuel, energy,
raw materials, part components, and merchandise and consumable items from the
vendor, receiving, storing, and disseminating inputs from suppliers: inspection and
inventory management.
ii) Operations: Activities costs and assets associated with converting inputs into final
product from (production, assembly, packaging, equipment maintenance, facilities,
operations, quality assurance and environmental protection).
iii) Outbound Logistics: Outbound logistics encompasses all of the resources,
capabilities, and processes required to distribute the final product or service. Examples
of outbound logistic items are warehousing, packaging, shipping, delivery vehicles (and

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maintenance), order picking, finished goods inventory control, distributor and customer
supply chain management (CRM – customer relationship management).
iv) Sales and Marketing: Sales and Marketing is considered everything associated with
marketing the product or service. The sales force, personal selling, advertising,
promotion, market research, web site, and dealer or distributor support are a few
examples of Sales and Marketing.
v) Service: Service is associated with providing assistance to the customer. Some Service
examples are installation, warranty work, maintenance, complaints, questions, repair,
and technical assistance.
Support Activities: These are activities in the firm that assist the firm as a whole by providing
infrastructure or inputs that allow the primary activities to take place on an on-going basis. The
support activities are:
i) General Administration: These are activities, costs and assets relating to the general
management, accounting and finance, legal and regulatory affairs, safety and security
management information systems and other overhead functions.
ii) Human Resources Management: This includes activities, costs and assets associated
with the recruitment, hiring, training and development and compensation of all types of
personnel labor relations activities and development of knowledge based skills.
iii) Research technology and Systems development: This includes activities, costs and
assets relating to product Research and Development, Process Research and
Development, process design improvement, equipment design, computer software
development, telecommunications systems, computer assisted design and engineering,
new data base capabilities and development of computerized support systems.
Practical Application of the Model
Porter (1980) suggests that for effective, practical application of the VCA Model, managers
should do the following;
i. Identify activities – The initial step while conducting VCA is to divide a company’s
operations in specific activities or business processes by grouping them to the various
primary and support activities.

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ii. Allocate cost – The next step is to allocate costs and assets to each activity. Every activity
in the value chain incurs cost and ties up time and assets. This is known as activity based
costing which provide a more meaningful analysis of the procurement functions cost and
consequent value added.
iii. Identify the activities that differentiate the firm – In addition to cost advantages and
disadvantages, scrutinizing the firm’s value chain also brings attention to several sources
of differentiation advantage relative to competitors.
iv. Examine the value chain – The firm’s managers at this point need to identify the activities
that are critical to buyer satisfaction and market success. It is those activities that deserve
major scrutiny in an internal analysis. At this stage it is important to take into account the
level of vertical integration when comparing the cost structure for activities on the value
chain to those of the key competitors. There is also the need for examining the costs
associated with activities provided by upstream and downstream. These activities
ultimately determine the comparable final costs to the end users.
3.2.3 McKinsey 7S’s Model
According to Johnson et al. (2011), this is a practical model that focuses on factors that are
internal to the business, some of which can be easily changed or improved upon. The 7S's
model is particularly useful when identifying internal factors in the business. It looks at the
following, Strategy, Structure, Style, Staff, Skills, Systems and Shared values.
They further argue that the model checks for the degree to which the firm possess the 7S's,
either as a strength or weakness.

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Fig 2: McKinsey’s 7Ss Model Source: Johnson et al. (2011)
3.2.4 Three Circle Analysis
Pearce and Robinson (2011) contends that this is an internal analysis technique where the
strategist examines customer’s needs, company offerings and competitor’s offerings to more
clearly articulate what their company’s competitive advantage is and how it differs from those
of its competitors.
Fig 3: Three Circle Analysis Source: Pearce and Robinson (2011)

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The strategizing team should first think deeply about what customers value and why. For
example, they might value speedy service because they want control of their own time or they
have other business or family obligations. (Exploring deeper values can open managerial eyes
and reveal new opportunities for value creation.) The first circle thus represents the team’s
consensus view of everything the most important customers or customer segments want or
need, (Urbany and Davis, 2007).
Urbany and Davis further say that the second circle represents the team’s view of how
customers perceive the company’s offerings. The extent to which the two circles overlap
indicates how well the company’s offerings are fulfilling customers’ needs. Even in very
mature industries customers don’t articulate all their wants or problems in conversations with
companies. Customers’ unexpressed problems can often become a source of relationship
building and growth opportunity.
They further say that the third circle represents the team’s view of how customers perceive the
offerings of the company’s competitors.
Pearce and Robinson (2011) observe that each area within the circles is strategically important,
but A, B, and C are critical to building competitive advantage. The team should ask questions
about each. For A: How big and sustainable are our advantages? Are they based on distinctive
capabilities? For B: Are we delivering effectively in the area of parity? For C: How can we
counter our competitors’ advantages?
Practical Application of the Model
To apply this model, Urbany and Davis (2007) propose that the team should form hypotheses
about the company’s competitive advantages and test them by asking customers questions. The
process can yield surprising insights, such as how much opportunity for growth exists in the
white space (E). Another insight might be what value the company or its competitors create
that customers don’t need (D, F, or G).
3.2.5 The Balanced Score Card Model (BSC)
According to Kaplan and Norton (2004), the balanced scorecard method is a management
technique that provides a view of an organization from both internal and external perspectives.
The characteristic of the Balanced Scorecard and its derivatives is the presentation of a mixture

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of financial and non-financial measures each compared to a 'target' value. The four main
perspectives of the balanced score card as presented by Kaplan and Norton (2004), are as
follows;
i. Financial: encourages the identification of a few relevant high-level financial measures. In
particular, strategists are encouraged to choose measures that answer the question "How do
we look to shareholders?"
ii. Customer: encourages the identification of measures that answer the question "How do
customers see us?"
iii. Internal Business Processes: encourages the identification of measures that answer the
question "What must we excel at?"
iv. Learning and Growth: encourages the identification of measures that answer the question
"How can we continue to improve and create value?”
Figure 4: The Balanced Score Card Source; David, P (2007)

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3.3 Industry and Market Environment Analysis Models and Perspectives
3.3.1 Porter’s Five Forces Model
Johnson et al. (2011) defines an industry as a group of firms producing products and services
that are essentially the same and a market as a group of customers for specific products or
services that are essentially the same (for example, a particular geographical market). They
contend that Porter’s five forces model is the most strategic tool used to analyse the
environment.
Strickland et al. (2005) suggest that the five forces holds the state of competition in an industry
to be a composite of competitive pressures operating in five key areas of the overall market.
The five forces are:
1. Pressures associated with the market manoeuvring and jockeying for buyer patronage that
goes on among rival sellers in the industry.
2. Pressures associated with the threats of new entrants.
3. Pressures from the attempts of companies in other industries to win buyers over to their
own substitute products.
4. Pressures stemming from supplier bargaining power and suppliers seller collaboration.
5. Pressures stemming from buyer bargaining power and seller-buyer collaboration.
The Five Forces tool is a simple but powerful tool for understanding where power lies in a
given business situation. This is important, as it helps you understand both the strength of your
current competitive position, and the strength of a position you’re looking to move into.
With a clear understanding of where power lies, you can take fair advantage of a situation of
strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an
important part of your business planning toolkit. The diagram below summarizes the five forces
and how they interact.

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Fig 5: Five Forces Model Source: Pearce and Robinson (2011)
Practical Application of the Model
The five forces framework provides useful insights into the forces at work in the industry or
market environment of an organisation. The attractiveness of using the framework to industry
is based on the following factors: a) helps a firm to determine which industry to enter, approach
and timings, b) helps determine the type of influence the company can exert,for example, .
mergers, joint ventures and c) helps respond to the question on how competitors may be
affected differently.
3.3.2 Scenario Analysis
Mellahi, Frynas and Finlay (2005) states that scenario analysis explores possible future events
by looking at particular causes and seek to understand and explain why certain events might or
might not occur. Scenario analysis is very different from other forecasting techniques, as it
does not try to predict what will actually happen. It simply tries to identify several possible
futures, each of which is plausible but not assured. Scenario analysis recognizes the
shortcomings of most forecasts by considering a number of different and plausible assumptions
about the future, rather than a single assumption which may prove wrong.

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Johnson et al. (2011) argues that Scenarios are used in situations where a business has high
levels of uncertainty arising from a complexity or rapid change (or both). Scenario analyses
are carried out to allow for different possibilities and help prevent managers from closing their
minds about alternatives. Scenario analyses can be carried out as follows:
a. Indentify the scope of the subject and time span of the scenario – how far into the future to
analyse?
b. Identify the key drivers for change. Here PESTEL factors could be used to uncover issues
likely to have a major impact upon the future of the industry, region or market.
c. Selecting opposing key drivers in order to generate a range of different but plausible
scenarios.
d. Developing Scenario stories, knitting together plausible “stories” that incorporate both key
drivers and other factors into a coherent whole.
e. Identify impacts of alternative scenarios on organizations in the final key stage of scenario
building.
3.3.3 Market Segmentation
Pearce and Robinson (2011) advise that at industry level, this is the third element that managers
need to analyse in order to get a very clear sense of the industry. Market segmentation aims at
identifying similarities and differences between groups of people who buy and use a company’s
goods and services. Market segmentation analysis will help in responding to questions such as:
a. Substitute products in the market that compete with those of the firm.
b. Who are the price sensitive customers that consume a firm’s produce and by how much a
firm can raise its prices without losing its core customers.
c. How far do customers travel to access the company’s products/services.
d. Why do customers buy a firm’s products and of what value are the products to the
customers?
e. What is the best distribution mechanism for a company’s products.
Segmenting the market into several levels along the above leading questions will help managers
to understand how to design a firm’s strategy.
3.3.4 Strategic Groups

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According to Jones and Hill (2009), strategic groups are groups of companies in which each
company follows a strategy that is similar to that pursued by other companies within the group
but different from the strategies followed by companies in other groups.
Companies within an industry often differ significantly from each other with respect to the
way they strategically position their products in the market in terms of factors such as i)
distribution channels, ii) Market segments they serve, iii) pricing policy, iv) advertising policy
and v) promotions.
Due to these differences, it is possible to observe groups of companies that pursue strategies
that are similar to those pursued by other companies within the same group yet again very
different from those pursued by other groups within the larger industry. A good example of an
industry where you find different strategic groups is the motor industry, with some dealers
trading in fuel products, spare parts, Matatu transport and mechanics.
The concept of strategic groups has a number of implications for the identification of
opportunities and threats within an industry. First, because all companies within a certain
strategic group, all products that they deal with are seen as direct substitutes for each other and
therefore pose a degree of competition. This means that competitors within such group are the
individual companies in the group and not those in the entire industry. Secondly, it is possible
that each strategic group may face a different set of opportunities and threats (Porter’s five
forces will apply at this level directly).
3.3.5 Industry Life Cycle Analysis
Jones and Hill (2009) argue that managers have to tailor their strategies to changing industry
conditions. And they have to learn to recognise the crucial points in an industry’s development
so that they can forecast when the shakeout stage of an industry might begin or when an
industry might be moving into decline. So, according to Jones and Hill (2009), an important
determinant of the strength of the competitive forces in an industry is the changes that take
place in it over time. The strength and nature of each of the competitive forces change as an
industry evolves.

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A good tool for analysing the effects of industry evolution of competitive forces is the industry
life cycle model that identifies 5 sequential stages in the evolution of an industry, as shown in
figure 6 below.
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Stages in the Industry Life Cycle (ILC)
Fig 6: Industry Life Cycle Source: Jones and Hill (2010)
Jones and Hill (2010) summarise each of the five stages as below:
1. Embryonic stage – a stage where an industry is beginning to develop, say, personal
computers in the early 1970s. Growth at this stage is limited due to buyer unfamiliarity
with the industry’s products, high costs, poorly developed distribution channels etc.
2. Growth stage – a stage where demand is expanding as first time consumers enter into the
market. An industry grows when the customers become familiar with the product, prices
fall because experience and scale of economies have been attained and distribution
channels developed.
3. Industry shakeout stage – this is a stage of industry evolution in which demand growth
goes down, competition intensifies, and weaker competitors exit industry. In this stage,
demand approached saturation levels, most of the demand is limited to replacement because
there are few potential first time buyers left.
4. Mature Industries – this is the stage where shakeout is over, the market is saturated,
demand is limited to replacement, and growth is slow. Whatever growth that is experienced
in this stage is due to population expansion that brings new customers or an increase in the

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replacement demand. As an industry enters maturity stage, barriers to entry increase, and
the threat of entry from potential investors/competitors decreases.
5. Declining Industries – this is the stage in which primary demand is declining. This is the
eventual stage for most industries where growth becomes negative for a variety of reasons,
including technological substitution, declining demographics (birth rates going down) and
international competition kicking in.
3.3.6 Ansoff’s Model
Thompson and Martin (2010) quote Ansoff (1987) that to survive and succeed in an industry;
the firm must match the aggressiveness of its operating and strategic behaviours to the
changeability of demands and opportunities in the market place. They add that the extent to
which the environment is changeable or turbulent depends on six factors; i) Changeability of
the market environment, ii) Speed of change, iii) Intensity of competition, iv) Fertility of
technology, v) Discrimination by customers and vi) Pressures from governments and influence
groups.
Ansoff suggests that the more turbulent the environment is, the more aggressive the firm must
be in terms of competitive strategies and entrepreneurialism or change orientation if it is to
succeed. He further suggests that the environment should be analysed in terms of competition
and entrepreneurship or change. The degree of competitive and entrepreneurial turbulence can
be calculated by attributing scores to various factors. The competitive environment is affected
by market structure and profitability, the intensity of competitive rivalry and the degree of
differentiation, market growth, the stage in the life of the products or services in question and
the frequency of new products launches, capital intensity and economies of scale.
3.3.7 Forecasting
Forecasting the future of the firm’s environment is as critical as analysing its current
environment. This is particularly due to the fact that as cost of changing strategy increases, the
need for change becomes more obvious (Porter, 1980). Forecasts are educated assumptions
about future trends and events such as future demand for specific products, future changes in
currency rates, or future shifts in technology. There are several ways of doing future forecasts;
among them are:

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i. Trend extrapolation – this is the extension of present trends into the future. The
assumption behind the method is that change occurs relatively slowly, and that there are
relatively few major discontinuities in the future. Trend extrapolation typically uses past
quantitative data to predict future economic trends. Trend extrapolations are believed to
significantly aid strategic decisions about future investments or product development and
thus important to consider.
ii. Delphi Survey – this approach questions future predictions by asking the opinion of experts
on the future of a specific subject using questionnaires and direct interviews.
3.4 External/Macro Environment Analysis Models and Perspectives
3.4.1 PESTEL Analysis
PESTEL is an acronym that stands for Political, Economic, Social, Technological,
Environmental and Legal. Johnson et al. (2011) suggest that PESTEL as a model is used for
determining the opportunities and risks within the operating environment of the business
organization.
Table 2: Macro environmental factors (PESTEL)
Demographic
factors
Population size , age structure, geographic distribution, ethnic mix, income
distribution
Economic
factors
Inflation rates, interest rates, trade deficits or surpluses, budget deficits or
surpluses, personal savings rate, business savings rates, gross domestic product,
gross national product
Political/Legal
factors
Taxation laws, labour laws, antitrust laws, cross border trade laws, deregulation
philosophies
Socio-cultural
factors
Gender issues, workforce diversity, attitudes about the quality of work life,
concerns about the environment, shifts in preferences regarding product and service
characteristics, shifts in work and career preferences
Technological
factors
Product innovations, application of knowledge, focus of private and government –
supported R&D expenditures, new communication technologies
Global factors Important political events, critical global, markets, newly industrialised countries,
different cultural and institutional attributes

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Table 3: PESTEL – Practical Application of Model
LOCAL NATIONAL GLOBAL
Political Provision of services by
local council, PEV of
2007/8, County
Governments,
Kenyan government policy on
subsidies, Upcoming elections,
change of Constriction,
World trade agreements
e.g. further expansion of
the EU, EAC, IGAD,
Advent of terrorisms
Economic Local income, sharing of
resources at county level,
county economies.
Kenyan, USA or UK interest
rates, Exchange rates, currency
fluctuations,
GDP, GNP etc
Overseas economic
growth, Global financial
crisis, emerging economies
Social Local population growth Demographic change (e.g.
ageing population)
Migration flows, epidemics
e.g. HIV/Aids,
Technological Improvements in local
technologies e.g.
availability of Digital TV
Kenyan wide technology e.g.
Mobile money transfer
services
International technological
breakthroughs e.g. internet
Environmental Local waste issues Kenyan weather Global climate change
Legal Local licences/planning
permission
Kenyan law/New constitution International agreements
on human rights or
environmental policy
3.4.2 Porter’s Diamond Model
Mellahi et al. (2005) quotes Michael Porter by stating that the key to global economic success
is innovation in the broadest sense, not just technological innovation but also new skills, new
knowledge, or the application of old ideas in new areas. He continues to argue that a strong
home base of a company often provides the basis for innovation, which in turn can lead to
global success. Porter’s Diamond model suggests that four characteristics of the home base
help to explain why certain nations are capable of consistent innovation in some sectors i.e. 1)
Factor conditions, 2) Demand conditions, 3) Related and supporting industries, and 4) Firm
strategy, structure and rivalry.
The above four factors are referred to as the Diamond factors and form the basis of Porter’s
Diamond Model. The Model assumes that the national home base of a firm plays a key role in
shaping that firm’s competitive advantage in global markets.

22. 22
Determinants of National Competitive
Advantage
Strategy,
Structure,
Rivalry
Factor
Endowments
Demand
Conditions
Related and
Supporting
Industries
National
Competitive
Advantage
Fig 7: Diamond Model Source: Mellahi et al. (2005)
4 Criticisms of some Models and Perspectives
4.1 SWOT Analysis
Pearce and Robinson (2011) observe that the SWOT model is a broad conceptual approach
that makes it susceptible to four (4) main criticisms. They argue that;
i. SWOT Analysis can overemphasize internal strengths and downplay external
threats. Strategists in companies have to be vigilant against building strategies around
the company’s strengths without due consideration of the external environment’s impacts
on those strengths.
ii. SWOT Analysis can be static and ignore changing environments. The downside of
developing strategic plans is that plans are developed once (one-time events) and shelved
while managers get on with their work. SWOT is therefore viewed as a one-time view of
a changing, or moving, dynamic environment. So SWOT analysis, along with other major
planning techniques must avoid being static and ignoring change.
iii. SWOT Analysis can overemphasize a single strength or element of strategy; which
may prove to be an oversimplification basis around which to sustain the company’s
strategy for continued dominance and growth in the market/industry. Example is
Safaricom’s reliance on the Mpesa technological innovation.
iv. A strength is not necessarily a source of competitive advantage.

23. 23
4.2 PESTEL Model
The main criticism of using PESTEL factors in analysing the external environment of a
company is that the variables themselves are continuously changing. An effective way of using
PESTEL analysis in a meaningful way is that it should include a thorough analysis of what is
affecting the organization NOW and what is likely to affect it in the FUTURE.
The result of a PESTEL analysis is usually a list of positive and negative factors that are likely
to affect a company. However, by themselves, these factors mean very little. PESTEL analysis
therefore requires careful application of results. The following is a summary of the key
criticisms of applying PESTEL to analyse a company’s environment.
1. PESTLE analysis is usually a simple list that is not critically presented.
2. The rapid pace of change in society makes it increasingly difficult to anticipate
developments that may affect an organisation in the future.
3. Collecting large amounts of information may make it difficult to see the wood for the trees
and lead to "paralysis by analysis."
4. The analysis may be based on assumptions that prove to be unfounded.
5. PEST analysis only covers the external environment and the results need to be considered
with other factors, such as the organisation itself, competitors and the industry in which it
is working.
4.3 Porter’s Five Forces Model
According to Mellahi et al. (2005), Porter’s Five forces model has come under heavy criticisms
in recent times. It has been said, for example,
i. That the model cannot help firms to cope with the fast-changing business
environment, worsened by globalization,
ii. That it cannot be used for analysing the position of charitable organizations or
government bodies, and
iii. That it disregards the importance of human resources management.
According to Mellahi et al. (2005), two of these key criticisms relate to the “static” nature of
the model discussed below;

24. 24
Static versus dynamic competition; the model has been criticised as to be too static, leading
managers to making wrong assumptions about the business environment. Managers are
expected to decide on their firm’s strategy based on an analysis of the five forces model,
assuming that these normally change so slowly. That the industry competition is fast changing,
accelerated by globalization and thus managers cannot make strategic decisions on the
assumptions that threats of entry will not grow or that new substitutes will be developed. A
firm has to be constantly improving and innovating, and therefore cannot hide behind barriers
of entry or its bargaining power towards existing suppliers. This would suggest that the five
forces model could be of little or limited value to managers.
Industry Profitability; Porter assumes that a firm’s profitability depends on how attractive the
industry is. According to Mellahi et al. (2005), research studies have compared the relative
significance of industry specific influences and firm specific influences on firm profitability,
and discovered that only a small proportion of firms’ profitability could be ascribed to the
industry in which the firm operates. Mellahi and his co-authors further argue that firm
profitability, based on the findings of this research; depend primarily on how skilful individual
units of the firm were. By implication, therefore, an analysis of the Five Forces cannot provide
a good guide to profitability.
The authors further observe that the Five Forces Model lacks a major force/industry player, the
government. The role of government is critical in regulating industry/market operations. The
rules and regulations by which firms operate are an important element that shapes competition
in any industry. Lastly, the model lacks a seventh force that requires recognition. When talking
about industry/market competition, complementors offer service or products that affects
industry’s performance. When complementors are important and their number is increasing,
demand and profits in the industry are boosted. When complementors are weak, industry
growth can slow and profits can be limited. Examples of complementors are like motor industry
and fuel, internet and e-business, farmers and millers etc.
4.4 Industry Life Cycle
Major critiques of Industry Life Cycle analysis cite three major limitation areas of the Life
Cycle model. These are:

25. 25
Life cycle issues
a. The embryonic stage can sometimes be skipped.
b. Industry growth can be revitalized.
c. The time span of each stage can vary.
Innovation and change
a. Innovation can unfreeze and reshape industry structure
b. An industry may be hypercompetitive, with permanent and ongoing change
Company differences
a. The importance of the company differences within an industry or strategic group can
be underemphasized.
b. The individual resources and capabilities of a company may be more important in
determining profitability than the industry or strategic group.
4.5 Balanced Score Card
The balanced score card has been acclaimed and used by many managers due to its exploitation
of both financial and non-financial measures. However, it has been criticized on the grounds
that it does not provide a bottom line score or a unified view with clear recommendations.
There could also be other critical perspectives not necessarily captured in the BSC model
(David, 2007), for instance, employee morale and satisfaction

26. 26
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