Business Environment Analysis

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DEPARTMENT OF BUSINESS AND
MANAGEMENT STUDIES
PROGRAMME: MBA MARKETING & STRATEGIC MANAGEMENT
COURSE TITLE: COMPETITIVE MANAGEMENT STRATEGIES
COURSE CODE: STM713
TOTAL CREDITS: 3
BY
NGANG PEREZ (MAJOR 1)
PAN AFRICAN INSTITUTE FOR DEVELOPMENT
-WEST AFRICA (PAID-WA) BUEA
LECTURE NOTES FOR COMPETITIVE
MANAGEMENT STRATEGIES

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WEEK 2:
SESSION 2/CHAPTER 2 BUSINESS ENVIRONMENT ANALYSIS
2.0 Brief Introduction
Most at times, buying a new car is an all time-consuming process. Before committing to spend $15,000 or more, you
spend lots of time searching the Internet for information, watching car ads, talking with friends or salespeople to get
their advice, and visiting dealer lots to check out competing models and take test drives. New cars are expensive, and
you expect to live with your decision for several years. So you want to get it right.
Now assume that you are a member of the aircraft purchasing team at All Nippon Airways (ANA), Japan’s second-
largest airline. Your team is charged with making recommendations for the purchase of 50 new airplanes for the
company’s fleet, at a total cost of more than $5 billion. All of a sudden, by comparison, your new car purchase decision
looks pretty simple. The difference, of course, is that new airplanes aren’t lined up in dealership showrooms. You can’t
go down to the lot to kick the tires and test-fly a new plane. And there are a lot more dollars at stake.
You can just imagine the research, evaluation, and debate that will go on into making such a multibillion dollar buying
decision. It is not different when carrying a business environment analysis.
2.1 LEARNING OBJECTIVES
By the end of this session, students should be able to;
 Carry out Macro Business Environmental Analysis
 Conduct Industry Analysis
 Evaluate Competitor Analysis
 Outline Problems in Identifying Competitors
 Conduct Market Analysis
2.2 DEFINITION OF KEY TERMS
 Competitor Analysis: The process of identifying key competitors; assessing their objectives, strategies, strengths
and weaknesses, and reaction patterns; and selecting which competitors to attack or avoid.
 Strategic Group: A strategic group is a group of firms in an industry following the same or a similar strategy in a
given target market.
 Business Portfolio Analysis: Business Portfolio Analysis is the process by which management evaluates the
products and businesses that make up the company. The major activity in strategic planning is business portfolio
analysis.
 Strategic Business Units (SBUs): An SBU can be a company division, a product line within a division, or
sometimes a single product or brand. It is the key businesses that make up the company.

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2.3 THE MAIN CONTENT
This chapter explores the environmental factors within which the business activities of an organization take place. The
chapter also outlines the process of PEST analysis, industry analysis, competitor analysis and market analysis. The use
of various approaches to facilitate an analysis of the environmental factors facing an organization, in particular the
‘Five Forces’ model and strategic groups, are covered.
2.3.1 Macro Business Environmental Analysis
The macro environment audit examines the broad range of environmental issues that may affect the organization. This
will include the political/ legal issues, economic factors, social/cultural issues and technological developments. This is
normally referred to as a PEST (Political, Economic, Social and Technological) analysis, although some writers use
the alternative acronym of STEP analysis (see Figure 2.1). The aim of this analysis is to identify the critical issues in
the external environment that may affect the organization, before moving on to judge the impact they may have on the
organization.
Figure 2.1 External Business Environmental factors
2.3.1.1Political/legal issues: There are a range of political organizations that have to be considered when looking at
influences in this area of the audit. The structure of a political system defines the centres of political influence. A state
with a federal political structure will differ from a unitary political system. In the UK there is a parliament for Scotland
and an assembly for Wales. There are, however, a number of decision areas that are still the responsibility of the
Westminster parliament. At the same time there is also an increasing range of decisions taking place both politically
and legally within the framework of the European Union. Political pressure groups, such as Greenpeace, can also affect
the political agenda. Therefore, when considering this area of the environment, a much wider view has to be taken than
just the domestic national government or the legal process.

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2.3.1.2 Economic factors: Similarly, economic factors have to be viewed from a wider perspective than the
organization’s domestic economy. In the global economy, domestic economic conditions are heavily influenced by
events in other areas of the world. Economics is concerned with the allocation of resources. Therefore, issues such as
conservation of natural resources, costs of pollution, energy consumption and the whole area of the management of
natural resources should be considered under this heading.
2.3.1.3 Social/cultural issues: Demographic changes are important and can be used as lead indicators in certain areas,
such as health care and education. However, other critical areas such as social/cultural values and beliefs that are central
to changes in consumer behaviour are harder to predict and can be subject to more dramatic shifts.
2.3.1.4 Technological developments: There is a great danger in using a particular technology to define an industry. In
a situation where technological developments are fast-moving it is critical to understand the fundamental consumer
needs which the organization’s technology is currently serving. Identifying new technologies that can service that
consumer’s needs more completely or economically is the critical part of this area of the analysis. The central role of
this PEST analysis is to identify the key factors that are likely to drive change in the environment. Then the aim is to
establish how these key factors will affect the industry in general and the organization in particular.
2.3.2 Industry Analysis
An organization has to understand the nature of the relationship within its industry in order to be able to develop
strategies to gain advantage of the current relationships.
A useful framework that can be utilized when undertaking this analysis is Porter’s ‘Five Forces’ model of establishing
industry attractiveness for a business (see Figure 2.2). This analysis should be conducted at the level of the individual
strategic business unit (SBU) rather than at the level of the organization as a whole, otherwise the range of relationships
facing a company with several divisions causes the analysis to lose focus. Porter identified five factors that affect the
level of competition and therefore profitability within an industry:
2.3.2.1 Suppliers Power: The power of suppliers is liable to be strong where:
 Control over supplies is concentrated into the hands of a few players.
 Costs of switching to a new source of supply are high.
 If the supplier has a strong brand.
 The supplier is in an industry with a large number of smaller disparate customers.
2.3.2.2 Buyers Power: The power of buyers is liable to be strong where:
 A few buyers control a large percentage of a volume market. For example, grocery and electrical goods retailers
in the UK dominate the market and are in a very strong position versus their suppliers as a result.
 There are a large number of small suppliers. In the meat industry in the UK there are a large number of small
farmers supplying a retail sector dominated by a small number of large supermarkets.
 The costs of switching to a new supplier are low.
 The supplier’s product is relatively undifferentiated, effectively lowering barriers to alternative sources of
supply.

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Figure 2.2 Porter Five Forces model
2.3.2.3 Threats of Potential Entrants: The threat of potential entrants will be determined by a number of barriers to
entry that may exist in any given industry:
 The capital investment necessary to enter the industry can be very high in areas such as electrical power
generation or chemical production.
 A well-entrenched competitor who moved into the industry early may have established cost advantages
irrespective of the size of their operation. They have had time to establish crucial aspects of their operation such
as effective sources of supply, the best locations, and customer franchises.
 Achieving economies of scale in production, distribution or marketing can be a necessity in certain industries.
 Gaining access to appropriate distribution channels can be difficult. Peugeot/Citroen bought Chrysler’s entire
UK operations in order to gain an effective dealership network in Britain.
 Government legislation and policies such as patent protection, trade relations with other states and state-owned
monopolies can all act to restrict the entry of competitors.
 The prospect of a well-established company’s hostile reactions to a new competitor’s entry to the market may
be enough to act as a deterrent.
2.3.2.4 Availability of Good Product Substitutes: Substitution can arise in a number of ways:
 A new product or service may eradicate the need for a previous process. Insurance services delivered directly
by producers over the phone or Internet are substitutes for the services of the independent insurance broker.
 A new product replaces an existing product or service. Cassette tapes replaced vinyl records, only to be replaced
by compact discs and compact discs have been replaced by memory cards and USB drives

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 All products and services, to some extent, suffer from generic substitution. Consumers may choose to substitute
buying a car in order to purchase an expensive holiday instead.
2.3.2.5 Competitive rivalry: The intensity of competition in the industry will be determined by a range of factors:
 The stage of the industry life cycle will have an effect. Natural growth reaches a plateau once an industry reaches
maturity; the only way an organization can continue to grow in the industry is to take market share off its rivals.
 The relative size of competitors is an important factor. In an industry where rivals are of similar size, competition
is likely to be intense as they each strive for a dominant position. Industries that already have a clear dominant
player tend to be less competitive.
 In industries that suffer from high fixed costs, companies will try to gain as much volume throughput as possible,
this may create competition based on price discounting.
 There may be barriers that prevent companies withdrawing from an industry. This may be plant and machinery
that is specialist in nature and therefore cannot be transferred to other uses. The workforce may have non-
transferable specialist skills. If the industry is in maturity, moving towards decline, and rivals cannot easily
leave the industry then competition inevitably will increase.
2.3.3 Competitor Analysis
The ‘Five Forces’ analysis has examined the overall industry and is a starting point in assessing a company’s
competitive position. This (five forces) is likely to be a rather broad definition of an industry and contains a number of
companies that would not be direct competitors. For example Toyota is likely to have a number of natural direct
competitors, but the TVR (independent British manufacturer of high-end sports cars) is not likely to be one of them,
although both companies are in the car industry. Hope you understand? Toyota’s scale is global and manufactures cars
across the full range, TVR is a specialist, low volume prestige sports car manufacturer. Companies that are direct
competitors in terms of products and customer profiles are seen as being in a strategic group. The car industry would
be made up of a number of strategic groups. We will come to this concept of strategic group latter.
To plan an effective competitive strategies, the company needs to find out all it can about its competitors. It must
constantly compare its departmental strategies, products, prices, channels, and promotions with those of close
competitors. In this way, the company can find areas of potential competitive advantage and disadvantage. Competitor
analysis involves first identifying and assessing competitors and then selecting which competitors to attack or avoid.
Figure 2.3 Process of Competitive Analysis
2.3.3.1 Identifying Competitors
Normally, identifying competitors would seem to be a simple task. At the narrowest level, a company can define its
competitors as other companies offering similar products and services to the same customers at similar prices. Thus,

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Chariot Hotel Buea might see Hotel Sinclaire Buea as a major competitor, but not Holiday Inn Buea. The Catholic
University Buea might see PAID-WA Buea as a major competitor, but not OIC Buea.
However, companies actually face a much wider range of competitors. The company might define its competitors as
all firms with the same product or class of products. Thus, PAID-WA should see itself in competition with all other
institutes of higher learning. Even more broadly, competitors might include all companies making products that supply
the same service or could act as substitutes. In this regard, Chariot Hotel would see itself competing not only against
other big hotels but also against anyone who supplies rooms for weary travelers, guest houses and summer homes.
Therefore, and still more broadly, competitors might include all companies that compete for the same consumer dollars.
Identifying competitors isn’t as easy as it seems. It’s really a complicated issue for businesses.
To be successful, Companies must avoid the “competitor myopia.” A company is more likely to be “buried” by its
latent competitors than its current ones. For example, it wasn’t direct competitors that put an end to Western Union’s
telegram business after 161 years; it was cell phones and the Internet. Music superstore Tower Records didn’t go
bankrupt at the hands of other traditional music stores; it fell victim to unexpected competitors such as Best Buy,
Walmart, and iTunes and other digital download services, through the advent of online downloading. Express Union is
facing it pretty challenging doing business in Cameroon now not due to stiff competition from express exchange and
other money transfer agencies but from hidden competitors like MTN and Orange mobile money. Another classic
example of competitor myopia is the Cameroon Postal Service which was rebranded as CAMPOST.
CAMPOST was and is still losing money at a mind-boggling rate—Millions of CFA per year. But it’s not direct
competitors such as DHL or esico that are the problem. Instead, it’s a competitor that the CAMPOST could hardly have
even imagined a decade and a half ago—the soaring use of personal and business e-mail and online transactions, this
is called “electronic diversion.”
Companies can identify their competitors from an industry point of view. They might see themselves as being in the
oil industry, the pharmaceutical industry, or the beverage industry. A company must understand the competitive
patterns in its industry if it hopes to be an effective player in that industry.
Companies can also identify competitors from a market point of view. From an industry point of view, Source du Pays
might see its competitors as Brasseries du Cameroun, GUINNESS Cameroon, and the makers of other soft drink brands.
From a market point of view, however the list of competitors might expand because what the customers’ really want is
a “thirst quenching”—a need that can be satisfied by bottled water, energy drinks, fruit juice, and many other beverages.
Here they define competitors as companies that are trying to satisfy the same customer need or build relationships with
the same customer group. From this perspective, a competitor must not only come from the same industry or market.
For example if a travel agency can succeed to divert advanced level students from going to University of Buea to travel
abroad, then that agency is a competitor to the University. So your competitors must not come from the same industry.
Thus in general, the market concept of competition opens the company’s eyes to a broader set of actual and potential
competitors.
2.3.3.2 Competitors’ Assessment
Having identified the main competitors, it is important now to ask: What are the competitors’ objectives? What does
each seek in the marketplace? What is each competitor’s strategy? What are the various competitor’s strengths and
weaknesses, and how will each react to actions the company might take?
a. Determining Competitors’ Objectives

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It is necessary to understand that each competitor has a mix of objectives, but the interest of a company is to know the
relative importance that a competitor places on current profitability, market share growth, cash flow, technological
leadership, service leadership, and other goals.
Knowing a competitor’s mix of objectives reveals whether the competitor is satisfied with its current situation and how
it might react to different competitive actions. For example, a company that pursues low-cost leadership will react much
more strongly to a competitor’s cost-reducing manufacturing breakthrough than to the same competitor’s advertising
increase.
A company also must monitor its competitors’ objectives for various segments. If the company finds that a competitor
has discovered a new segment, this might be an opportunity. If it finds that competitors plan new moves into segments
now served by the company, it will be forewarned and, hopefully, a forearmed strategy will be necessary.
Competitor’s objectives can be identified by analyzing three important factors:
i. Whether the competitor’s current performance is likely to be fulfilling their objectives. If not, the
competitor may initiate a change of strategy.
ii. How likely the competitor is to commit further investment to the business. Financial objectives may
indicate this. Investment is more likely from companies that have objectives which are long-term in nature,
such as market share and sales growth, rather than organizations under pressure to produce short-term
profitability. This also reveals potential trade-offs the competitor may be willing to take. If short-term
profitability is the key objective then the rival is likely to be willing to lose market share in the short term
in order to achieve its profitability targets.
iii. The likely future direction of the competitor’s strategy. The organization may have non-financial
objectives, such as gaining technology leadership.
b. Identifying Competitors’ Strategies
The more that one firm’s strategy resembles another firm’s strategy, the more the two firms compete. In most industries,
the competitors can be sorted into groups that pursue different strategies.
Strategic groups are made up of organizations within the same industry that are pursuing equivalent strategies targeting
groups of customers that have similar profiles. TVR’s strategic group is likely to contain Ferrari, Bugatti, Lotus,
Lamborghini, Aston Martin etc. All these companies are following similar strategies and facing similar strategic
questions. They are also aiming at very similar market segments.
For example, within the Cameroon context in the construction retail industry, QUIFFEROU and FOKOU belong to the
same strategic group. Each produces a full line of similar products. They retail a broad line of higher-quality products,
offer a higher level of service, and charge a moderate price. In contrast, other small retailing construction enterprises
belong to a different strategic group. They retail a narrower line of medium/low-quality products, and charge a premium
price.
Some important insights emerge from identifying strategic groups. For example, if a company enters a strategic group,
the members of that group become its key competitors. Thus, if the company enters a group containing QUIFFEROU
and FOKOU, it can succeed only if it develops strategic advantages over these two companies.
Although competition is most intense within a strategic group, there is also rivalry among groups. First, some strategic
groups may appeal to overlapping customer segments. For example, no matter what their strategy, all major appliance

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manufacturers will go after the apartment and homebuilders segment. Second, customers may not see much difference
in the offers of different groups; finally, members of one strategic group might expand into new strategy segments.
Thus, TOURISTIC line of classic buses may compete in the premium-quality, with FINEX VIP line.
The company needs to look at all the dimensions that identify strategic groups within the industry. It must understand
how each competitor delivers value to its customers. It needs to know each competitor’s product quality, features, and
mix; customer services; pricing policy; distribution coverage; sales force strategy; and advertising and sales promotion
programs. And it must study the details of each competitor’s R&D, manufacturing, purchasing, financial, and other
strategies.
There are a range of attributes that can be used to identify strategic groups. Some examples are: size of the company,
assets and skills, scope of the operation, breadth of the product range, choice of distribution channel, relative product
quality and brand image.
For many companies, analyzing every competitor in its generic industry would be a difficult task in terms of
management time and company resources. Defining an organization’s strategic group allows a company to concentrate
its analysis on its direct competitors and to examine them in more detail.
Tools that are used to analyze the internal environment, such as the Shell directional policy matrix (Shell, 1975), can
of course be used to analyze competitors. For each competitor in their strategic group an organization needs, as far as
possible, to establish the following: Competitor’s objectives (which we’ve already seen), Competitor’s current and past
strategies, Competitor’s capabilities and Competitor’s future strategies and reactions.
i. Competitor’s current and past strategies: There are three areas that should be explored in order to establish
a competitor’s current activities:
 Identification of the current markets, or market segments, within which the competitor currently operates. This
will indicate the scope of the business.
 Identification of the way the competitor has chosen to compete in those markets. Is it based on quality of service,
brand image or on price?
 Comparison between the current strategy and past strategies can be instructive. First, it can illustrate the
direction the competitor is moving, in terms of product and market development, over time. It can also highlight
strategies that the organization has tried in the past and that have failed. The competitor is unlikely to attempt these
approaches again without considerable reservations.
ii. Competitor’s capabilities: An analysis of a competitor’s assets and competencies allows a judgement to be
made about how well equipped they are to address the market, given the dynamics in the industry and the trends in the
external environment. In order to evaluate a competitor’s potential challenge to an organization a number of areas need
to be examined (Lehman and Weiner, 1991): Management capabilities, Marketing capabilities, Innovation capabilities,
Production capabilities and Financial capabilities
Companies need to carefully assess each competitor’s strengths and weaknesses to answer a critical question: What can
our competitors do? As a first step, companies can gather data on each competitor’s goals, strategies, and performance
over the past few years. Admittedly, some of this information will be hard to obtain. For example, B-to-B marketers
find it hard to estimate competitors’ market shares because they do not have the same syndicated data services that are
available to consumer packaged-goods companies.

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Companies normally learn about their competitors’ strengths and weaknesses through secondary data, personal
experience, and word of mouth. They can also conduct primary marketing research with customers, suppliers, and
dealers. Or they can benchmark themselves against other firms, comparing one company’s products and processes to
those of competitors or leading firms in other industries to identify best practices and find ways to improve quality and
performance. Benchmarking is the process of comparing the company’s products and processes to those of competitors
or leading firms in other industries to identify best practices and find ways to improve quality and performance.
Benchmarking has become a powerful tool for increasing a company’s competitiveness.
iii. Competitor’s future strategies and reactions: One of the aims of the competitor analysis so far has been to
gather information on rivals to establish their likely future strategy. Equally important is to evaluate a competitor’s
likely reactions to any strategic moves the organization might instigate. The reactions of organizations can be
categorized into four types of response (Kotler et al., 1996):
Certain retaliation: The competitor is guaranteed to react in an aggressive manner to any challenge. Market leaders,
in particular, are likely to react in this manner against any threat to their dominant position. Companies that have an
aggressive culture may also fall into this category
Failure to react Competitors can be lulled into a false sense of security in an industry that, over a long period of time,
has seen very little change. In this situation companies can be extremely slow to react to a competitive move. The
classic example is British motorcycle companies failing to react to the entry of Japanese manufacturers into the lower
end of the market.
Specific reactions: Some competitors may react, but only to competitive moves in certain areas. For instance they may
always react to any price reductions, or sales promotions, as they believe these will have an important impact on their
business. But they may fail to respond to a competitor’s increase in advertising expenditure. The more visible the
competitor’s move the more likely a competitor is to respond. Actions that are less visible, such as support material for
the sales force or dealerships, are less likely to face a response.
Inconsistent reactions: These companies’ reactions are simply not predictable. They react aggressively on occasion
but at other times ignore similar competitive challenges
2.3.3.3 Selecting Competitors to Attack and Avoid
A company has already largely selected its major competitors through prior decisions on customer targets, distribution
channels, and its marketing-mix strategy. Management now must decide which competitors to compete against most
vigorously.
i. Strong or Weak Competitors
The company can focus on one of several classes of competitors. Most companies prefer to compete against weak
competitors. This requires fewer resources and less time. But in the process, the firm may gain little. You could argue
that the firm also should compete with strong competitors to sharpen its abilities. Moreover, even strong competitors
have some weaknesses, and succeeding against them often provides greater returns.
A useful tool for assessing competitor strengths and weaknesses is customer value analysis. The aim of customer value
analysis is to determine the benefits that target customers’ value and how customers rate the relative value of various
competitors’ offers. In conducting a customer value analysis, the company first identifies the major attributes that

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customer’s value and the importance customers place on these attributes. Next, it assesses its performance and the
performance of its competitors on those valued attributes.
The key to gaining competitive advantage is to take each customer segment and examine how the company’s offer
compares to that of its major competitors. The company wants to find the place in the market where it meets customers’
needs in a way that rivals can’t. If the company’s offer delivers greater value by exceeding the competitor’s offer on
important attributes, the company can charge a higher price and earn higher profits, or it can charge the same price and
gain more market share. But if the company is seen as performing at a lower level than its major competitors on some
important attributes, it must invest in strengthening those attributes or finding other important attributes where it can
build a lead on its competitors.
ii. Close or Distant Competitors
Most companies will compete with close competitors—those that resemble them most—rather than distant competitors.
Thus, Nike competes more against Adidas than against Timberland.
At the same time, the company may want to avoid trying to “destroy” a close competitor. For example, in the late
1970s, Bausch & Lomb moved aggressively against other soft lens manufacturers with great success. However, this
forced weak competitors to sell out to larger firms such as Johnson & Johnson (J&J). As a result, Bausch & Lomb then
faced much larger competitors—and it suffered the consequences. J&J acquired Vistakon, a small nicher with only $20
million in annual sales. Backed by J&J’s deep pockets, the small but nimble Vistakon developed and introduced its
innovative Acuvue disposable lenses. With Vistakon leading the way, J&J is now the dominant U.S. contact lens maker,
while Bausch & Lomb lags in third place. In this case, success in hurting a close rival brought in tougher competitors.
iii. Good or Bad Competitors
A company really needs and benefits from competitors. The existence of competitors results in several strategic
benefits. Competitors may share the costs of market and product development and help legitimize new technologies.
They may serve less-attractive segments or lead to more product differentiation.
Finally, competitors may help increase total demand. For example, you might think that an independent coffeehouse
surrounded by Starbucks stores might have trouble staying in business. But that’s often not the case:
However, a company may not view all its competitors as beneficial. An industry often contains good competitors and
bad competitors. Good competitors play by the rules of the industry. Bad competitors, in contrast, break the rules. They
try to buy share rather than earn it, take large risks, and play by their own rules.

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For example, the nation’s bilingual daily newspaper-Cameroun Tribune face a lot of bad competitors these days. Digital
services that overlap with traditional newspaper content are bad competitors because they offer for free real-time
content that subscription-based newspapers printed once a day can’t match. An example is the bareta news.com, the
online newspaper and website that lets local users get insider source for everything local, national and international
thing concerning Cameroon. Such unorthodox digital competitors have helped to drive many traditional newspapers
into bankruptcy in recent years.
2.3.4 Problems in Identifying Competitors
Analyzing members of a strategic group provides crucial information on which to base strategic decisions. However,
there are risks in the process of identifying an organization’s competitors and a number of errors should be avoided:
Overlooking smaller competitors by placing too much emphasis on large visible competitors.
Focusing on established competitors and ignoring potential new entrants.
Concentrating on current domestic competitors and disregarding international competitors who could possibly enter
the market.
The competitive analysis has allowed the organization to establish its relative position versus its competitors on a range
of important criteria.
However, the organization has to judge itself and its competitors against the market it is operating within. At this stage
in the external analysis it is useful to establish a range of information about the market. The customer and market
segmentation would also be considered under a market analysis but you may find this in your marketing management
lecture note.
2.3.5 Finding Uncontested Market Spaces
Rather than competing head to head with established competitors, many companies seek out unoccupied positions in
uncontested market spaces. They try to create products and services for which there are no direct competitors. Called a
“blue ocean strategy,” the goal is to make competition irrelevant:
Companies have long engaged in head-to-head competition in search of profitable growth. They have flocked for
competitive advantage, battled over market share, and struggled for differentiation. Yet in today’s overcrowded
industries, competing fiercely results in nothing but a bloody “red ocean” of rivals fighting over a shrinking profit pool.
Although most companies compete within such red oceans, the strategy isn’t likely to create profitable growth in the
future. Tomorrow’s leading companies will succeed not by battling competitors but by creating “blue oceans” of
uncontested market space. Such strategic moves—termed value innovation—create powerful leaps in value for both
the firm and its buyers, creating all new demand and rendering rivals obsolete. By creating and capturing blue oceans,
companies can largely take rivals out of the picture.
2.3.6 Market Analysis
A market analysis will be made up of a range of factors relevant to the particular situation under review, but would
normally include the following areas: Actual and potential market size, market trends, customers, customer segments
distribution channels.

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Guided by the company’s mission statement and objectives, management now must plan its business portfolio—the
collection of businesses and products that make up the company. The best business portfolio is the one that best fits the
company’s strengths and weaknesses to opportunities in the environment.
2.3.6.1 Business Portfolio Analysis
Business portfolio planning involves two steps.
First, the company must analyze its current business portfolio and determine which businesses should receive more,
less, or no investment. Second, it must shape the future portfolio by developing strategies for growth and downsizing.
Business Portfolio Analysis is the process by which management evaluates the products and businesses that make up
the company. The major activity in strategic planning is business portfolio analysis. The company will want to put
strong resources into its more profitable businesses and phase down or drop its weaker ones.
i. The Concept of Strategic Business Units (SBUs)
Management’s first step is to identify the key businesses that make up the company, called strategic business units
(SBUs). An SBU can be a company division, a product line within a division, or sometimes a single product or brand.
The company, next assesses the attractiveness of its various SBUs and decides how much support each deserves. When
designing a business portfolio, it’s a good idea to add and support products and businesses that fit closely with the
firm’s core philosophy and competencies.
A strategic business unit (SBU) meets the following criteria: 1. It has a clearly defined market. 2. It faces identifiable
competitors in an external market (as opposed to being an internal supplier). 3. As a separate, distinct, and identifiable
unit whose assets do not depend on the existence of another SBU, its manager has control over planning and decision
areas that determine success of the business.
The purpose of strategic planning is to find ways in which the company can best use its strengths to take advantage of
attractive opportunities in the environment. So most standard portfolio analysis methods evaluate SBUs on two
important dimensions: the attractiveness of the SBU’s market or industry and the strength of the SBU’s position in that
market or industry. The best-known portfolio-planning method was developed by the Boston Consulting Group, a
leading management consulting firm.
Using the classic Boston Consulting Group (BCG) approach, a company classifies all its SBUs according to the growth-
share matrix, as shown in figure 2. On the vertical axis, market growth rate provides a measure of market attractiveness.
On the horizontal axis, relative market share serves as a measure of company strength in the market. The growth-share
matrix defines four types of SBUs:
1. Stars. Stars are high-growth, high-share businesses or products. They often need heavy investments to
finance their rapid growth. Eventually their growth will slow down, and they will turn into cash cows.
2. Cash Cows. Cash cows are low-growth, high-share businesses or products. These established and
successful SBUs need less investment to hold their market share. Thus, they produce a lot of the cash that the company
uses to pay its bills and support other SBUs that need investment.
3. Question Marks. Question marks are low-share business units in high-growth markets. They require a
lot of cash to hold their share, let alone increase it. Management has to think hard about which question marks it should
try to build into stars and which should be phased out.

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4. Dogs. Dogs are low-growth, low-share businesses and products. They may generate enough cash to
maintain themselves but do not promise to be large sources of cash.
Figure 2.4: The BCG Growth-Share Matrix
The 10 doted circles in the growth-share matrix represent the company’s 10 current SBUs. The company has two stars,
two cash cows, three question marks, and three dogs. The areas of the circles are proportional to the SBU’s dollar sales.
This company is in fair shape, although not in good shape. It wants to invest in the more promising question marks to
make them stars and maintain the stars so that they will become cash cows as their markets mature. Fortunately, it has
two good-sized cash cows. Income from these cash cows will help finance the company’s question marks, stars, and
dogs. The company should take some decisive action concerning its dogs and its question marks.
Once it has classified its SBUs, the company must determine what role each will play in the future. It can pursue one
of four strategies for each SBU.
1. “Milk “the cows—the strategy for cash cows is to spend enough on them to maintain their market share and “keep
them healthy” so they can continue to generate cash.
2. “Shine” the stars—the strategy for stars is to continue to invest funds to support their growth rate and high market
shares. They will eventually slow in growth and become cash cows and help generate funds for new stars.
3. “Solve” the problems—the strategy for these SBUs involves one of two options: (a) develop and test strategies for
improving market share, or (b) divest and use the cash to support other more promising SBUs.
4. “Divest” the dogs—Dogs SBUs with low share and low growth potential are prime prospects for divestiture. Cash
generated by divesting these SBUs can be reinvested into other SBUs with more potential.
As time passes, SBUs change their positions in the growth-share matrix. Many SBUs start out as question marks and
move into the star category if they succeed. They later become cash cows as market growth falls and then finally die
off or turn into dogs toward the end of their life cycle. The company needs to add new products and units continuously
so that some of them will become stars and, eventually, cash cows that will help finance other SBUs.

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ii. Limitations of the BCG Matrix.
The BCG and other formal methods revolutionized strategic planning. However, such centralized approaches have
limitations: They can be difficult, time-consuming, and costly to implement. Management may find it difficult to define
SBUs and measure market share and growth. In addition, these approaches focus on classifying current businesses but
provide little advice for future planning.
Because of such problems, many companies have dropped formal matrix methods in favor of more customized
approaches that better suit their specific situations. Moreover, unlike former strategic-planning efforts that rested mostly
in the hands of senior managers at company headquarters, today’s strategic planning has been decentralized.
Increasingly, companies are placing responsibility for strategic planning in the hands of cross-functional teams of
divisional managers who are close to their markets
2.3.7 Significance of Business Environment Analysis
Figure 2.5 Advantages of Business Environment Analysis
2.4 Conclusion
A company’s business environment consists of the actors and forces outside the business that affect management’s
ability to build and maintain successful relationships with target customers. More than any other department in the
company, marketers must be environmental trend trackers and opportunity seekers. Although every manager in an
organization should watch the outside environment, marketers have two special aptitudes. They have disciplined
methods—marketing research and marketing intelligence—for collecting information about the marketing

16
environment. They also spend more time in customer and competitor environments. By carefully studying the
environment, marketers can adapt their strategies to meet new marketplace challenges and opportunities.
The business environment consists of a micro environment and a macro environment. The micro environment consists
of the actors close to the company that affect its ability to serve its customers—the company, suppliers, marketing
intermediaries, customer markets, competitors, and publics. The macro environment consists of the larger societal
forces that affect the microenvironment—demographic, economic, natural, technological, political, and cultural forces.
2.5 Summary
The external auditing process creates the information and analysis necessary for an organization to begin to identify
the key issues it will have to address in order to develop a successful strategy. The PEST analysis uncovers the critical
areas in the external environment that the organization needs to consider. The industry analysis reveals the structure
and strengths of players in the industry that any strategy will be required to address. The competitor analysis discloses
the relative position of the direct competitors in the strategic group. Finally, the market analysis begins to explore
current trends and areas of growth. More importantly it begins to build a picture of the consumer.
2.6 Review Questions
I. For an industry sector of your choice identify the key strategic groups.
II. Outline the content and structure of a competitor analysis.
III. As a young business consultant, can actions be taken to reduce competitive rivalry, or are there ways of building
barriers to dissuade companies from considering entering the industry? Explain with facts
IV. Using the Boston Consulting Group (BCG) matrix, a company classifies all its SBUs according to the growth
potentials. Take a typical telecommunication communication in Cameroon or a company in the brewery industry to
demonstrate a comprehensive review of the BCG matrix on its products.
2.7 References
 Diffenbach, J. (1983) Corporate environmental analysis in large US corporations. Long Range Planning, Vol.
16, No. 3, pp. 107–116.
 Kotler, P., Armstrong, G., Saunders, J. and Wong, V. (1996) Principles of Marketing: The European Edition.
Prentice Hall.
 Lehman, D.R. and Weiner, R.S. (1991) Analysis for Marketing Planning, 2nd edn. Irwin. Porter, M.E. (1980)
Competitive Strategy. The Free Press, p. 4.
2.8 Task
 Read the notes on unit 2.3.7 (Significance of Business Environment Analysis) and elaborate in details but not
more than 5 pages.

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2.9 Reading Assignment/Suggested Readings: Netflix Case Study
Although the recent down economy has taken its toll on the retail industry as a whole, the stars are still shining on
Netflix. Business has been so good that Netflix met its most recent new subscriber goal weeks before the deadline. In
early 2009, Netflix surpassed 10 million subscribers—a remarkable feat. Eighteen months later, that number had grown
by 50 percent to 15 million subscribers. Clearly, all these new customers are good for the company’s financials.
Customers are signing up for the same reasons they always have—the convenience of renting movies without leaving
home, a selection of more than 100,000 DVD titles, and low monthly fees. But the company’s current good fortunes
may also be the result of consumers looking for less expensive means of entertainment. They may even be the result of
consumers escaping the gloom of financial losses and economic bad news. Whatever the case, Netflix appears to have
a product that thrives in bad times as well as in good.
1. Visit www.netflix.com. After browsing the Web site and becoming more familiar with the company’s offerings,
assess the macro environmental trends that have led to Netflix’s success in recent years.
2. Which trends do you think have contributed most to Netflix’s current growth following recent economic woes?
2.10 Reading Assignment Supplementary Source
 You Tube Video lecture: Business Environment Analysis | SM - CA IPCC
 Video Highlights: - Neat and quick explanations on what is business environment analysis
 Note: To access the video, copy and paste this Playlist
 URL: https://youtu.be/E0kbsSpe8zU?t=4
 Source: https://www.youtube.com/watch?v=E0kbsSpe8zU. Retrieved 17 December 2018,
2.11 Written Assignment
Using the Boston Consulting Group (BCG) matrix, a company classifies all its SBUs according to the growth potentials.
Take a typical telecommunication communication in Cameroon or a company in the brewery industry to demonstrate
a comprehensive review of the BCG matrix on its products.
2.12 Discussion Assignment
Discuss the benefits of undertaking an environmental analysis
2.13 Graded Quiz
Will be provided by the end of the lecture

Business Environment Analysis

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