Essential Analysis Frameworks in the External and Organizational Environment - Case Study Example

Strategic Management Essential Analysis Frameworks in the External and Organizational Environment Organisations analyse how their strategic capabilities might be used to enhance competitive advantage. This involves the analysis of the organisation’s internal environment using analysis frameworks such as Value Chain Analysis, VRIO Analysis, Resource-Based View and SWOT analysis. In terms of eternal environment, the organisation analyses its macro-environment using the PESTEL tool of analysis which includes the study of political, economic, social, technological, environmental and legal factors affecting the organisation. Other frameworks of studying the external environment include Porter’s Five Forces Framework, strategic groups and value net. Tesco is a food retailer headquartered in United Kingdom and has branches in over 12 countries. In this essay, the author suggests that the essential analysis frameworks for Tesco in the external and organisational environments are SWOT, Value Chain Analysis, Resource-Based View, PESTEL and Five Porter’s Forces Framework. PESTEL refers to the process of identifying and analysing political, economic, social, technological, environmental and legal factors that affect the strategic position and competitive advantage of an organisation (Hunger & Wheelen, 2001). Political factors affecting Tesco include government policies, political stability and government institutions (Sadler, 2003). Global political factors affect the business practices of Tesco because it operates in the global market. For instance, the admission of China into WTO in 2001 created an opportunity for the company the market its products in China (Office for National Statistics 2009). It is also affected by tax rates, legislations and environmental policies of the UK. The company chooses markets with high political stability and few legal business restrictions and control by the government. Some of the economic factors affecting Tesco include GDP of the countries it operates, inflation, interest rates, exchange rates, monetary and fiscal policies, and labour costs (Capon, 2008). An organisation may identify these factors and analyse them to determine if they offer opportunities or threats for business operations. For instance, the financial crisis of 2008 and the euro zone debt crisis of 2011 affected the economy of Europe, including UK. As a result, GDP declined and purchasing power of consumers declined; hence Tesco experienced low demand of its products. Analysing the social factors enables the company to choose products, services and delivery mechanisms that are suitable for the culture and social setting of the target market (David, 2005). For instance, UK is made up of mainly the ageing population who eat less, causing reduction of demand for food products. Technological factors are also some of the external factors that determine the strategic position of a company in the market. They include infrastructural level, technological advancement, Research and Development costs, technology incentives, internet availability and technological change (Rothaermel, 2012). UK retail market is enhanced by advanced internet technology which involves online shopping. Internet subscriptions in UK have risen by more than 50% in 2009 (Office for National Statistics 2009). This creates an opportunity for meeting customers through the internet. In terms of environmental factors, an organisation needs to understand the levels of climate, weather changes, environmental policies, green production, waste management, and attitudes towards renewable energy (Johnson et al, 2014). UK government encourages reduced packaging through its environmental policy, affecting retailers like Tesco significantly. Legal factors affecting businesses include anti-trust law, taxation, employment law, intellectual property law, discrimination law and health and safety law (Johnson et al, 2014). For example, in UK the government increased its VAT to 20% due to huge budget deficits for the government. These laws affect the operations, costs and demand for products of a company. The second framework used to analyse the external environment is the Porter’s Five Forces Framework. This framework is used to examine the level of competition in the market. According to Michael Porter, there are five forces that shape competition in the market: the threat of substitutes, threat of entry, bargaining power of suppliers, bargaining power of buyers, and level of competitive rivalry (Porter, 1980). Understanding these factors enables Tesco to identify the attractiveness of an industry in terms of competition, and profitability of the overall industry. Rivalry of existing competitors affects the profitability and attractiveness of an industry because the rival competitors offer the same products in the same market. The level of competitive rivalry increases when the competitors of almost equal sizes are aggressively seeking leadership in mature or declining markets (Porter, 1980). The rivalry is high in UK’s retail industry with companies such as Asda, Sainsbury and Morrisons with market shares of 16.8%, 15.8*, and 11.3% respectively in 2010 (Tesco PLC, 2014). Under these circumstances, the competitive advantage and profitability of the companies may be low. This analysis enables the company to develop appropriate competitive strategies to gain a competitive edge over existing competitors. By analysing the threat of entry, Tesco identifies the factors that should be overcome by new entrants in order to compete successfully. High barriers to entry lead to low threats to entry by new firms (Warner & Business Expert Press, 2010). Some of the barriers to entry that can be raised by Tesco include high fixed costs, experience and learning, differentiation costs, government restrictions, resistance from incumbents and access to distribution channels. The third Porter’s third force of competition is the threat of substitutes. The availability of substitutes gives customers alternatives to choose from (Johnson et al, 2014). Tesco’s main substitutes are food products from small convenience stores and organic shops. Tesco can overcome these threats by opening Express stores in local towns. Identifying substitutes also enables a company to choose markets with few substitutes (Dobbs, 2014). In terms of bargaining power of buyers, it is necessary for companies to find out if the buyers in the market are powerful. Powerful buyers demand cheap prices or higher product quality, leading to reduced profits of the company (Narayanan & Fahey, 2005). Understanding bargaining power of buyers also enables Tesco to know when to increase switching costs for customers in order to reduce their bargaining power. The switching costs of Tesco’s buyers are few because it has unique and differentiated products. Lastly, analysing the bargaining power of suppliers is necessary for Tescoto minimise its costs and earn higher profits. When suppliers have high bargaining power, they demand high prices for the inputs they supply to organisations (Narayanan & Fahey, 2005). Tesco should therefore analyse the bargaining power suppliers in the market in order to determine whether the costs of products supplied to the company can be covered by the prices of outputs and produce profits. The bargaining power of suppliers for Tesco is low. The organisational environment can be analysed using the Resource Based View (RBV) because it enables the organisation to identify its distinctive capabilities needed to achieve competitive advantage and superior performance (Mathews, 2003). Strategic capabilities of an organisation are capabilities that enhance the survival or competitive advantage of an organisation, including resources and competencies. According to David (2009), sustainable competitive advantage if an organisation is attributed to its possession of non-substitutable, inimitable and valuable resources. In this case, the resource-based view is important in analysing the organisational environment because resources are critical to competitive advantage in the industry, and can form basis for normative strategic prescriptions of the organisation. If the company determines that its capabilities are few, it will develop appropriate mechanisms to acquire them, e.g. through borrowing funds, hiring competent staff, acquiring new technology, or investing in unique brands. The resource-based view assumes that firms in an industry have heterogeneous (unique) resources. This heterogeneity may persist over time within one firm because they are not perfectly mobile from one firm to another. Barney (2003) suggests that this heterogeneity is the primary source of competitive advantage of firms. Therefore, companies need to carry out analysis of their organisational environment using the RBV framework in order to determine if they have heterogeneous resources to obtain competitive advantage (Barney, 2001). Tesco’s resources are heterogeneous, especially raw materials and human resources. The resources of firm include physical resources, financial resources and human resources. Financial resources include machines, vehicles, land, computers, stock, raw materials and buildings. The ownership of these physical resources enables the company to provide unique products and services to customers. Financial resources include balance sheet, cash flows and profits. Tesco has sufficient financial resources, including revue of £70,894 million, ROCE of 12.1% and profit of £3,054 million (Tesco PLC, 2014). These financial resources show that the company has the ability to grow and expand beyond the current markets, and make new investments in viable projects. It also has knowledgeable and skilled employees who can improve innovation and service delivery in the company in order to achieve competitive advantage. Value Chain Analysis is also an essential framework of analysing the organisational environment. The Value chain refers to activities that work together to create a product or service. There are primary activities involved in the value chain: inbound logistics, operations, outbound logistics, service, and marketing and sales. Support activities provide support to the primary activities and include: firm infrastructure, technology development, procurement, and human resource management (Johnson et al, 2014). Together, these activities determine the competitive advantage of an organisation. It is therefore necessary for an organisation to use the value chain analysis to scan its organisational environment in order to determine if all activities of the value chain are present in the organisation. The strategic management of Tesco is characterized by a lean and flexible function of inbound logistics. The company utilizes its market share and economies of scope to achieve cost leadership. Ordering systems are also constantly upgraded to achieve good logistics, and in-store processes have also been improved to make service delivery faster and reduce queues in stores (Tesco PLC, 2014). The leadership in online and offline retail also gives the company an advantage of efficient and effective outbound logistics. In terms of marketing and sales, Tesco has introduced loyalty programs in form of a Clubcard which discourages customers from switching to competitors. The value chain is also important because it is used to identify cost structures of the organisation throughout the value chain (Henderson and Mitchell, 1997). This leads to the development of an effective business model for the organisation. The value chain is also used alongside the resource-based view to identify profits in different functions of the organisation and develop mechanisms of using existing capabilities to maximise profitability and minimise costs. Lastly, the SWOT analysis is an essential framework of analysing both internal and external environment of the organisation. From the PESTEL, Porter’s Five Forces, RBV and Value-chain frameworks, an organisation can identify its strengths, weaknesses, opportunities and threats (Pickton and Wright, 1998). It is a framework that summarises the findings of all the other tools of analysis. For example, PESTEL analysis and Porter’s Five Forces may identify high inflation, high competition, government stability, and low government interventions. In this case, the SWOT analysis will categorise the factors into threats and opportunities because they belong to the external environment. High competition and recession of UK market are threats while government stability is an opportunity for Tesco. Resource-based view and Value chain has found out that Tesco has a lot of financial resources and qualified staff (Strength). SWOT is therefore important because it enables the company to summarise the findings of all the other tools of analysis and get a clear picture of what it needs to take advantage of (strengths and opportunities) and what it needs to improve on (weaknesses and threats). Clearly, the most important methods of analysing external environment of Tesco are PESTEL analysis and Porter’s Five Forces Frameworks. PESTEL analysis enables the organisation to identify the opportunities and threats of its target market in terms of political, economic, social, technological, environmental and legal factors. Porter’s five forces model leads to the identification of the level of competition and how this affects profitability in the industry. The organisational environment is analysed using RBV and Value-chain frameworks. The RBV model provides an opportunity for Tesco to scan its resourcefulness and determine if its resources are unique, inimitable and immobile in order to enhance competitive advantage. Value chain enables the organisation to identify the most successful activities of its value chain, and the areas that need improvement in order to add value to the customer’s offerings. Lastly, the SWOT analysis is used to summarise the strengths, weaknesses, opportunities and threats that affect the organisation’s strategic position. References list Barney, J 2001, “Is the resource-based “view” a useful perspective for strategic management research? Yes”, Academy of Management Review, Vol. 26, No. 1, pp. 41-56. Campbell, DJ & Craig, T 2005, Organisations and the business environment, Elsevier Butterworth-Heinemann, Amsterdam. Capon, C 2008, Understanding strategic management, Pearson Education Ltd, New York. 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