By Roshan pant MBM 2nd semester NEPAL COMMERCE CAMPUS CHAPTER 2 SITUATIONAL ANALYSIS:

Situation analysis refers to a collection of methods that managers use to analyze an organization's internal and external environment to understand the organization's capabilities, customers, and business environment.The situation analysis consists of several methods of analysis: The 5Cs Analysis, SWOT analysis and Porter five forces analysis. A Marketing Plan is created to guide businesses on how to communicate the benefits of their products to the needs of potential customer. The situation analysis is the second step in the marketing plan and is a critical step in establishing a long term relationship with customers. The situation analysis looks at both the macro-environmental factors that affect many firms within the environment and the micro-environmental factors that specifically affect the firm. The purpose of the situation analysis is to indicate to a company about the organizational and product position, as well as the overall survival of the business, within the environment. Companies must be able to summarize opportunities and problems within the environment so they can understand their capabilities within the market

5C ANALYSIS

1. Company

The company analysis involves evaluation of the company's objectives, strategy, and capabilities. These indicate to an organization the strength of the business model, whether there are areas for improvement, and how well an organization fits the external environment

2. Competitors

The competitor analysis takes into consideration the competitors position within the industry and the potential threat it may pose to other businesses. The main purpose of the competitor analysis is for businesses to analyze a competitor's current and potential nature and capabilities so they can prepare against competition. The competitor analysis looks at the following criteria:

 Identify competitors: Businesses must be able to identify competitors within their industry. Identifying whether competitors provide the same services or products to the same customer base is useful in gaining knowledge of direct competitors. Both direct and indirect competitors must be identified, as well as potential future competitors.  Assessment of competitors: The competitor analysis looks at competitor goals, mission, strategies and resources. This supports a thorough comparison of goals and strategies of competitors and the organization.  Predict future initiatives of competitors: An early insight into the potential activity of a competitor helps a company prepare against competition

3. Customers

Customer analysis can be vast and complicated. Some of the important areas that a company analyzes includes:[5]

 Demographics

 Advertising that is most suitable for the demographic  Market size and potential growth  Customer wants and needs  Motivation to buy the product  Distribution channels (online, retail, wholesale, etc...)  Quantity and frequency of purchase  Income level of customer

4. Collaborators

Collaborators are useful for businesses as they allow for an increase in the creation of ideas, as well as an increase in the likelihood of gaining more business opportunities.The following type of collaborators are:

 Agencies: Agencies are the middlemen of the business world. When businesses need a specific worker who specializes in the trade, they go to a recruitment agency.  Suppliers: Suppliers provide raw materials that are required to build products. There are 7 different types of Suppliers: Manufacturers, wholesalers, merchants, franchisors, importers and exporters, independent crafts people and drop shippers. Each category of suppliers can bring a different skill and experience to the company.  Distributors: Distributors are important as they are the 'holding areas for inventory'. Distributors can help manage manufacturer relationships as well as handle vendor relationships.  Partnerships: Business partners would share assets and liabilities, allowing for a new source of capital and skills.

Businesses must be able to identify whether the collaborator has the capabilities needed to help run the business as well as an analysis on the level of commitment needed for a collaborator- business relationship 5. Climate

To fully understand the business climate and environment, many factors that can affect the business must be researched and understood. An analysis on the climate is also known as the PEST analysis. The types of climate/environment firms have to analyse are:

 Political and regulatory environment: An Analysis of how active the government regulates the market with their policies and how it would affect the production, distribution and sale of the goods and services.  Economic Environment: An Analysis of trends regarding macroeconomics, such as exchange rates and inflation rate, can prove to influence businesses.[5]  Social/cultural environment: Interpreting the trends of society,[5] which includes the study of demographics, education, culture etc...  Technological analysis: An analysis of technology helps improve on old routines and suggest new methods for being cost efficient. To stay competitive and gain an advantage over competitors, businesses must sufficiently understand technological advances.

SWOT ANALYSIS

A SWOT Analysis is another method under the situation analysis that examines the Strengths and Weaknesses of a company (internal environment) as well as the Opportunities and Threats within the market (external environment). A SWOT analysis looks at both current and future situations, where they analyze their current strengths and weaknesses while looking for future opportunities and threats. The goal is to build on strengths as much as possible while reducing weaknesses. A future threat can be a potential weakness while a future opportunity can be a potential strength.[13] This analysis helps a company come up with a plan that keeps it prepared for a number of potential scenarios.

Porter's Five Forces Industry Analysis

The Porter models involves scanning the environment for threats from competitors and identifying problems early on to minimize threats imposed by competitors. This model can apply for any type of business, from small to larger sized businesses. It is important to take note that the Porter’s five forces model are not just for businesses, but can also be applied to a country to help gain insight into creating a competitive advantage in the global market.[14] The ultimate purpose of the Porter's five forces model is to help businesses compare and analyze their profitability and position with the industry against indirect and direct competition.[15]  The threat of new entrant: New entrants affect the company’s profits as the consumers have more variety to choose from.  Bargaining power of buyers: The companies influence on the buyer to purchase their product or how much the buyer depends on the product being produced by the firm.  Threat of substitute product of services: more than one firm producing similar or the same product or service.  Bargaining powers of suppliers: Company dependence on resources the suppliers provide to create their product or services.  Rival among existing competitors: Rivals fighting to be dominant in the market, to stay in business and maximize profit. SCOPE OF SITUATIONAL ANALYSIS A situational analysis often is called the foundation of a marketing plan. A situational analysis includes a thorough examination of internal and external factors affecting a business. It creates an overview of the organization that will lead to a better understanding of the factors that will influence its future.

The Facts

Utilizing market research, a situational analysis will define potential customers, projected growth, competitors and a realistic assessment of your business. It involves targeting the specific objectives in the business and identifying the factors that will support or hinder those objectives. This assessment often is called a SWOT (strengths, weaknesses, opportunities and threats). Strengths and weaknesses involve an internal analysis of the company, while opportunities and threats are derived from an external analysis. A SWOT analysis usually is presented as a list of information but also can fit into a matrix model. Internal Analysis

The internal analysis is a thorough knowledge and understanding of the strengths and weaknesses within an organization. These factors are seen in company culture and image, organizational structure, staff, operational efficiency and capacity, brand awareness, financial resources, etc. Strengths are positive attributes, which can be tangible or intangible, and are within the control of the organization. Weaknesses are factors that may hinder the achievement of the desired goal.

External Analysis

Opportunities and threats are measured as part of an external analysis. Both can occur when things happen in the external environment that may require a change within the business. These external changes can be attributed but not limited to market trends, suppliers, partners, customers, competitors, new technology and economic environment. Opportunities present themselves as attractive factors that can propel or positively influence the organization in some way. Threats are external factors that could place the organization’s goal at risk. These often are classified by their level of severity and probability of occurrence. Function

A SWOT profile is used to create goals, strategies and implementation practices. It aids in decision-making across the organizational board and creates an understanding of the organization. The four categories are used in relation to one another. For example, a business may decide to build up a weak area to pursue an upcoming opportunity. A SWOT can be used in problem solving, future planning, product evaluation, brainstorm meetings, workshop sessions, etc. Considerations

Multiple perspectives are required to thoroughly investigate the internal and external influences on a business. A SWOT can oversimplify a situation when factors are forced into categories in which they may not apply. Also, the classification of strengths, weaknesses, opportunities and threats can be somewhat subjective; certain factors could qualify as an opportunity and a threat.

ORGANIZATION INTERNAL AND EXTERNAL FACTORS

If there is anything that is steadfast and unchanging, it is change itself. Change is inevitable, and organizations that don't accept change and that make adjustments to their business model based on changes are doomed to fail. There are events or situations that occur that affect the way a business operates, in a positive or negative way. These events or situations can have either a positive or a negative impact on a business and are called 'environmental factors.'

There are two types of environmental factors: internal environmental factors and external environmental factors.

Internal environmental factors are events that occur within an organization. Generally speaking, internal environmental factors are easier to control than external environmental factors. Some examples of internal environmental factors are as follows:

 Management changes  Employee morale  Culture changes  Financial changes and/or issues

External environmental factors are events that take place outside of the organization and are harder to predict and control. External environmental factors can be more dangerous for an organization given the fact they are unpredictable, hard to prepare for, and often bewildering. Some examples of external environmental factors are noted below:  Changes to the economy  Threats from competition  Political factors  Government regulations  The industry itself

ORGANIZATION INTERNAL/ EXTERNAL ANALYSIS(SWOT)

SWOT is an acronym used to describe the particular Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company. A SWOT should represent an organizations core competencies while also identifying opportunities it can not currently use to its advantage due to a gap in resources.

The SWOT analysis framework has gained widespread acceptance because of its simplicity and power in developing strategy. Just like any planning tool, a SWOT analysis is only as good as the information that make it up. Research and accurate data is vital to identify key issues in an organization’s environment.

Assess your market:

 What is happening externally and internally that will affect our company?  Who are our customers?  What are the strengths and weaknesses of each competitor? (Think Competitive Advantage)  What are the driving forces behind sales trends?  What are important and potentially important markets?  What is happening in the world that might affect our company?  What does it take to be successful in this market? (List the strengths all companies need to compete successfully in this market.)

Assess your company:

 What do we do best?  What are our company resources – assets, intellectual property, and people?  What are our company capabilities (functions)?

Assess your competition:

 How are we different from the competition?  What are the general market conditions of our business?  What needs are there for our products and services?  What are the customer-market-technology opportunities?  What are the customer’s problems and complains with the current products and services in the industry?  What “If only….” Statements does a customer make? Opportunity an area of “need” in which a company can perform profitably.

Threat

A challenge posed by an unfavorable trend or development that would lead (in absence of a defensive marketing action) to deterioration in profits/sales.

An evaluation needs to be completed drawing conclusions about how the opportunities and threats may affect the firm.

EXTERNAL: MACRO- demographic/economic, technological, social/cultural, political/legal MICRO- customers, competitors, channels, suppliers, publics INTERNAL RESOURCES: the firm

Competitor analysis is a critical aspect of this step.

 Identify the actual competitors as well as substitutes.  Assess competitors’ objectives, strategies, strengths & weaknesses, and reaction patterns.  Select which competitors to attack or avoid.

The Internal Analysis of strengths and weaknesses focuses on internal factors that give an organization certain advantages and disadvantages in meeting the needs of its target market. Strengths refer to core competencies that give the firm an advantage in meeting the needs of its target markets. Any analysis of company strengths should be market oriented/customer focused because strengths are only meaningful when they assist the firm in meeting customer needs. Weaknesses refer to any limitations a company faces in developing or implementing a strategy (?). Weaknesses should also be examined from a customer perspective because customers often perceive weaknesses that a company cannot see. Being market focused when analyzing strengths and weaknesses does not mean that non-market oriented strengths and weaknesses should be forgotten. Rather, it suggests that all firms should tie their strengths and weaknesses to customer requirements. Only those strengths that relate to satisfying a customer need should be considered true core competencies. (Marketing and Its Environment, pg 44)

The following area analyses are used to look at all internal factors effecting a company:

 Resources: Profitability, sales, product quality brand associations, existing overall brand, relative cost of this new product, employee capability, product portfolio analysis  Capabilities: Goal: To identify internal strategic strengths, weaknesses, problems, constraints and uncertainties

The External Analysis takes a look at the opportunities and threats existing your organizations environment. Both opportunities and threats are independent from the organization. You can differenciate between strengths/weakness and opportunities/threats is to ask this essential question: Would this be an issue if the organization didn’t exist? If yes, it is an issue that is external to the organization. Opportunities are favorable conditions in an organization’s environment that can produce rewards if leveraged properly. Opportunities must be acted on if the organization wants to benefit from them. Threats are barriers presented to organization which prevent them from reaching their desired objectives.

The following area analyses are used to look at all external factors effecting a company:

 Customer analysis: Segments, motivations, unmet needs  Competitive analysis: Identify completely, put in strategic groups, evaluate performance, image, their objectives, strategies, culture, cost structure, strengths, weakness  Market analysis: Overall size, projected growth, profitability, entry barriers, cost structure, distribution system, trends, key success factors  Environmental analysis: Technological, governmental, economic, cultural, demographic, scenarios, information-need areas Goal: To identify external opportunities, threats, trends, and strategic uncertainties

The SWOT Matrix helps visualize the analysis. Also, when executing this analysis it is important to understand how these element work together. When an organization matched internal strengths to external opportunities, it creates core competencies in meeting the needs of its customers. In addition, an organization should act to convert internal weaknesses into strengths and external threats into opportunities.

Focus on your strengths. Shore up your weaknesses. Capitalize on your opportunities. Recognize your threats.

Identify

 Against whom do we compete?  Who are our most intense competitors? Less intense?  Makers of substitute products?  Can these competitors be grouped into strategic groups on the basis of assets, competencies, or strategies?  Who are potential competitive entrants? What are their barriers to entry?

Evaluate

 What are their objectives and strategies?  What is their cost structure? Do they have a cost advantage or disadvantage?  What is their image and positioning strategy?  Which are the most successful/unsuccessful competitors over time? Why?  What are the strengths and weaknesses of each competitor?  Evaluate competitors with respect to their assets and competencies.

Size and Growth What are important and potentially important markets? What are their size and growth characteristics? What markets are declining? What are the driving forces behind sales trends?

Profitability For each major market consider the following: Is this a business are in which the average firm will make money? How intense is the competition among existing firms? Evaluate the threats from potential entrants and substitute products. What is the bargaining power of suppliers and customers? How attractive/profitable are the market now and in the future?

Cost Structure What are the major cost and value-added components for various types of competitors?

Distribution Systems What are the alternative channels of distribution? How are they changing?

Market Trends What are the trends in the market?

Key Success Factors What are the key success factors, assets and competencies needed to compete successfully? How will these change in the future?

Environmental Analysis An environmental analysis is the four dimension of the External Analysis. The interest is in environmental trends and events that have the potential to affect strategy. This analysis should identify such trends and events and the estimate their likelihood and impact. When conducting this type of analysis, it is easy to get bogged down in an extensive, broad survey of trends. It is necessary to restrict the analysis to those areas relevant enough to have significant impact on strategy.

This analysis is divided into five areas: economic, technological, political-legal, sociocultural, and future.

Economic What economic trends might have an impact on business activity? (Interest rates, inflation, unemployment levels, energy availability, disposable income, etc)

Technological To what extent are existing technologies maturing? What technological developments or trends are affecting or could affect our industry?

Government What changes in regulation are possible? What will their impact be on our industry? What tax or other incentives are being developed that might affect strategy development? Are there political or government stability risks?

Sociocultural What are the current or emerging trends in lifestyle, fashions, and other components of culture? What are there implications? What demographic trends will affect the market size of the industry? (growth rate, income, population shifts) Do these trends represent an opportunity or a threat?

Future What are significant trends and future events? What are the key areas of uncertainty as to trends or events that have the potential to impact strategy?

Internal Analysis Understanding a business in depth is the goal of internal analysis. This analysis is based resources and capabilities of the firm.

Resources A good starting point to identify company resources is to look at tangible, intangible and human resources.

Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identifies and valued in the firm’s financial statements.

Intangible resources are largely invisible, but over time become more important to the firm than tangible assets because they can be a main source for a competitive advantage. Such intangible recourses include reputational assets (brands, image, etc.) and technological assets (proprietary technology and know-how).

Human resources or human capital are the productive services human beings offer the firm in terms of their skills, knowledge, reasoning, and decision-making abilities.

RESOURCE MAIN CHARACTERISTICS KEY INDICATORS Tangible Financial The firm’s borrowing capacity and its  Debt to equity ratio internal funds generation determines  Ration of net cash to capital its capacity to weather fluctuations in expenses demand and profits overtimes.  Credit rating

Physical The physical resources related to  Resale value of assets plan, equipment, assets, technology,  Age of capital equipment raw materials.  Flexibility of PPE

Intangible Technological Stock of technology in the form of proprietary technology (copyright, patents, trade secrets) and expertise in the application of technology (know- how). Reputation Reputation with customers through  Brand recognition the ownership of brands, established  Price premium over relationships with customers, competing brands reputation of the firm’s products and  Percent of repeat buying services.Reputation of the company  Level and consistency of with suppliers, employees, etc. company performance

Human Resources Training and expertise of employees  Educational, technical and determine the skills available to the professional qualifications of firm.Adaptability of employees employees determines key aspects of strategic  Compensation relative to flexibility of the firm.Commitment industry and loyalty of employees determines  Record of labor disputes the capacity of the firm to attain and  Employee turnover maintain competitive advantage.

Capabilities

Resources are not productive on their own. The most productive tasks require that resources collaborate closely together within teams. The term organizational capabilities is used to refer to a firm’s capacity for undertaking a particular productive activity. Our interest is not in capabilities per se, but in capabilities relative to other firms. To identify the firm’s capabilities we will use the functional classification approach. A functional classification identifies organizational capabilities in relation to each of the principal functional areas.

Functional Area Capability Corporate  Financial management  Expertise in strategic control  Effectiveness in motivating and coordinating business units  Management of partnerships  Overall company management/ resource management

Information Management  Comprehensive and effective information system that can be used for managerial decision making

Research and Development  Capability in basic research

Product Design  Design capability Marketing  Brand management and promotion  Promotion and exploiting reputation for quality  Understand of and responsiveness to market trends

Sales and Fulfillment  Effectiveness in promoting and executing sales  Efficiency and speed of fulfillment  Quality and effectiveness of customer service

SCANNING THE ENVIRONMENT

What is Environmental Scanning?

Environmental scanning is a review of external sources to discover factors that impact a business. The main goal is to identify and consult sources outside the business. Although these sources are uncontrollable from the business' perspective, it is important to consider them in the decision-making process.

One popular method of environmental scanning is SWOT analysis. Each letter stands for one area to review: strengths, weaknesses, opportunities, and threats. The strengths and opportunities are factors within the company, and the weaknesses and threats come from sources outside the company.

To remain competitive, businesses need to scan the competition.

What External Sources Should be Scanned?

When companies are putting resources and time toward an environmental scan, they want the results to be as comprehensive as possible. Most scans include a thorough look at the competition, economics, technology, legal issues, and social/demographic factors. Let's dive a little deeper into each of these areas using The Pool Stop, an imaginary small business that sells and services swimming pools.

Competition

Businesses should scan the competition to find out how they stack up to competitors and how they can earn a customer's business. It's vital to know what the competition is doing so that a business can be in touch with trends and issues.

Our example company, The Pool Stop, has been the only pool company in the area for 20 years, but a competitor crept into the market this year. The Pool Stop may have to change the way it does business now that consumers have another option. It should look closely at the competitor's services, products, pricing, location, customer service, and customer feedback. Comparing what the company offers versus the competition opens doors for improvement and opportunities to grow and change.

Economics

Businesses need to study the economy to discover the current trends, buying power, and strength. Are people losing their jobs and cutting back on spending? This may be a sign to re-evaluate the pricing strategy, because there are times it may be better to take a 20% profit rather than a 50% profit. Staying on top of what is going on in the economy will save the business from a negative surprise in its finances. It is better to make gradual adjustments with the economy than a big change that scares away customers.

Technology

Technology has had a dramatic impact on small businesses. Specifically, the use of social media and the Internet has never been more vital to a business' success. Years ago, a business only used technology in the office to take care of finances and maintain the cash register and customer information. Fast-forward a few years, and businesses were paying $500 and up to have a website built to attract customers. Now, the Internet has evolved to the point that a business can maintain multiple free accounts on different websites to connect with a huge number of customers.

In addition to using technology to share information, businesses are using it to sell to customers around the world. Why is this scary to a small business? These customers can often get a much better price than you can give them. They simply have to be willing to wait for it. Each business must review how much the Internet impacts sales and how to make the Web work for them instead of against them.

The Pool Stop is a small business that does not need a lot of bells and whistles. The company does not want to sell products online, but it does want to keep customers up-to-date on sales, specials, and current products. A scan of available technology reveals that The Pool Stop could accomplish these goals with a free social media page. Promoting what is in the store and available for quick pick-up is ideal for a marketing campaign.

Legal

The legal environment includes health, safety, taxes, and advertising regulations. Not knowing is not an excuse--every business is required to research, understand, and meet these regulations. What would happen if a restaurant kept a filthy kitchen? It would be shut down. What would happen if a construction company had numerous injuries? It would be reviewed to find out if the company is following safety precautions. Businesses should know regulations to train employees and move forward successfully. Not only will this help the company avoid fines, but it will keep it in business for the long haul.

Thus Environmental scanning can be defined as ‘the study and interpretation of the political, economic, social and technological events and trends which influence a business, an industry or even a total market’.[2] The factors which need to be considered for environmental scanning are events, trends, issues and expectations of the different interest groups. Issues are often forerunners of trend breaks. A trend break could be a value shift in society, a technological innovation that might be permanent or a paradigm change. Issues are less deep-seated and can be 'a temporary short-lived reaction to a social phenomenon'.[3] A trend can be defined as an ‘environmental phenomenon that has adopted a structural character

Factors influencing the market can be categorized under 6 different titles, demographic, economic, ecology, technology, regulatory-political and society-culture.

1. Demographic factors: are associated with changing nature and volume of population. It follows how people are conducting themselves in the new world, increasing per capita income, urban migration, ethnically diverse cities and mega cities. These are some demographic factors companies are monitoring. For example, a country like India and China are showing highest concentration of youth population where as Japan is showing high number of retired workers. Therefore, demand and consumption of product will also be different. 2. Economic factors: deals with function like purchasing power parity, income level, savings level and interest rates among many other. For example, countries with a high income level are more likely to afford luxury items compare to a low income level country. Savings level and interest rate determine the borrowing power as well as spending power of consumer. 3. Ecological factors: consist of natural resource composition in a given county. For example, demand for fossil fuel has sky rocketed in recent years there by increasing general price level in the market. Companies, therefore, are looking forward to designing products which eco-friendly design that is they are less fuel dependent and give out less pollution. 4. Technology factors: like internet and connectivity are changing the face of business. More and more people are doing business online. Science and medicine are also part of technology factors. Challenge for the company is to keep up with innovation and offer products, which are not obsolete. 5. Political environment: is also changing with more and more market based system rather than the socialist system. Furthermore, regulatory requirements like competition policy, investment policy, tax policy, etc. companies should investigate before taking their business to a particular country. 6. Culture environment: deals with factors like opinion people have towards themselves, others, organization and society in general. People have become more eco conscious, contributing one or many causes they can relate to, want organization to be responsible for their action and are looking to open society with meaningful co-existence.

All this 6 factors define any market environment and companies must understand them before developing their business plan.

Finally An environmental scan includes an industry analysis where you will discuss the external environmental factors that have, or could have, an impact on business operations. Information for conducting an environmental scan can be found in the sources below.

Competitive Environment

What to investigate

Who are your leading competitors? What are their products or services and how do they compare to your product? What market segment do they target? How easy is it for new competition to enter this market? What are your competitors' strengths and weaknesses – and how this can help you distinguish your company? What can you learn from watching your competition? Economic Environment

What to investigate: What economic indicators are most relevant for your company? What economic trends might affect your business? What is the buying power of your target market? Technological Environment

What to investigate

Internet, e-commerce, and social media trends. How technology has/will have an impact on your product or service. Political and Legal Environment

What to investigate:

Legal factors such as health and safety, product safety, advertising regulations, product labeling and legal laws.

Political factors such as trade regulations, taxes, and government stability. Social/Demographic Environment

What to investigate

Factors such as education levels, age distribution, consumerism, income level, population growth, expectation of society from the business.

NOTE: PESTEL analysis is done by Environmental Scanning

The six environmental factors of the PESTEL analysis are the following:

Political factors

 Taxation Policy  Trade regulations  Governmental stability  Unemployment Policy, etc.

Economical factors

 Interest rate  Inflation rate  Growth in spending power  Rate of people in a pensionable age  Recession or Boom  Customer liquidations  Balances of Sharing

Socio-cultural

 Values, beliefs  language  religion  education  literacy  time orientation  lifestyle

Technological factors

 Internet  E-commerce  Social Media  Electronic Media  Research and Development  Rate of technological change

Environmental factors

 Competitive advantage  Waste disposal  Energy consumption  Pollution monitoring, etc.

Legal factors

 employment law  Health and safety  Product safety  Advertising regulations  Product labeling  labor laws etc.