Chapter 2 – Strategic Planning & The Marketing Environment
- Describe how a company analyzes its internal environment.
- Describe the external environment a company may face and how it is analyzed.
Strategic planning is a process that helps an organization allocate its resources to capitalize on opportunities in the marketplace. Typically, it is a long-term process. The strategic planning process includes conducting a situation analysis and developing the organization’s mission statement, objectives, and strategies. This is then followed by the development of a segmentation, targeting and positioning strategy and the implementation of the marketing mix to support the strategy. Figure 2.1 “The Strategic Planning Process” shows the components of the strategic planning process. Let’s now look at each of these components.
Conducting a Situation Analysis
As part of the strategic planning process, a situation analysis must be conducted before a company can decide on specific actions. Therefore, before beginning a situation analysis, it is important to understand and keep top of mind the decision, or action being considered. To understand what is relevant for a situation analysis, it is important to know what decision will need to be made or action taken as a result of the situation analysis. This will help to focus the analysis on relevant aspect for the decision or action to be taken. This is important, because as one embarks on the analysis, there will be lots of data about what is going on in the surrounding business environment. In order to make the best decision or take the appropriate action, it is important to only consider situational analysis factors that are relevant to the decision. ‡
A situation analysis involves analyzing the environment in which the business operates. This includes both the external (macro factors outside the organization) and the internal (micro – company) environments. The company’s internal (micro) environment— such as company resources (financial, technological, etc), capabilities (such as personnel, and processes) and corporate partners (such as distribution and suppliers)—has to be examined. In looking internally at the company aspects, it is important to consider how the company resources and capabilities and the corporate partnerships compare against the competition. Does the company have better or worse resources and capabilities as compared to the competition and does the company have better or worse corporate partnerships?
It is also critical to examine the external macro environments the company faces, such as the political/legal/regulatory, economic, socio-cultural, technological, and competitive (PESTC) environments. The external environment significantly affects the decisions a company makes, and thus must be continuously evaluated. For example, during the most recent 2020 economic downturn, businesses found that government regulation had significant impact on their business. Given the COVID-19 pandemic, many governments within Canada and from around the world imposed many operating restrictions, forcing them to close their brick-and-mortar stores and pivot to online only, curbside pickup or take-out only model. While a business cannot control things such as the economy, political, regulatory or legal restrictions, changes in demographic trends, or what competitors do, it must decide what actions to take to remain competitive—actions that depend in part on their environment. ‡
Assessing the Internal Environment
The first step in understanding the business situation is to look internally within the company (i.e. the micro environment) and assess the company (resources, capabilities) and its corporate partnerships, in comparison to the competitors. ‡
Figure 2.3 “Analyzing the Micro (Internal) Environment” is an illustrative (not exhaustive) list of the type of things to consider when analyzing the micro environment of the business. The first aspect to consider is to look internally within the company and assess its resources and capabilities. In considering the micro environment of the business, it is necessary to analyze these aspects in comparison to the competition. For each aspect considered, think about whether the company being analyzed is better or worse in comparison to the competition. For example, when thinking about company brand reputation, does the company being analyzed have a stronger or weaker brand reputation than the competition? Does the company have a better or worse corporate culture in comparison to the competition? Does the company have access to specific assets or patents to which the competition does not (or vice versa)? Does the company have a better manufacturing process that provides an advantage to them over the competition? ‡
Similarly, does the company have corporate partnerships that provide an advantage, or does the competition have a partnership that create a weakness for your company? The company may have access to exclusive distribution partnerships, which give it exclusive access to customers to which the competition would not be able to reach. Alternatively, the competition may have an exclusive supplier partnership that gives it access to raw materials which creates an advantage for the competition. ‡
In looking at the internal aspects of the company, and making comparisons to the competition, it is important to consider the different types of competition. Often when we think about competition, we think about the direct competitors. For example, consider the beverage Canada Dry ginger ale. When thinking about their competition, one would think about Schweppes ginger ale and Seagram’s ginger ale. While these brands are competitors to Canada Dry, they are only the direct competitors. ‡
When looking at micro environment comparisons to the competition, it is also important to consider indirect competitors. If we continue with the Canada Dry ginger ale example, think about the need which is being satisfied with the purchase of a Canada Dry ginger ale. The need to quench one’s thirst can be satisfied with a Canada Dry ginger ale, however, there are other products that can satisfy that same need. For example, one may decide to purchase a diet ginger ale product, or water, or a sports drink or even a beer or wine product. Therefore, it is important to also consider indirect competitors when conducting the analysis. ‡
Assessing the External Environment
Analyzing the external environment involves tracking conditions in the macro environment that, although largely uncontrollable, affects the way an organization does business. The macro environment includes political/ legal/regulatory, economic, socio-cultural, technological, and competitive factors (PESTC). Each factor in the macro environment is discussed separately in the next section.
When companies globalize, analyzing the environment becomes more complex because they must examine the external environment in each country in which they do business. Regulations, competitors, technological development, and the economy may be different in each country and will affect how companies do business. To see how factors in the external environment such as technology may change education and lives of people around the world, watch the videos “Did You Know 2021?”.
Did You Know 2021?
Although the external environment affects all organizations, companies must focus on factors that are relevant for the decision or action to be taken. For example, government regulations on food packaging will affect PepsiCo but not Goodyear. Similarly, students getting a business degree don’t need to focus on job opportunities for registered nurses.
The Political and Legal/Regulatory Environment
All organizations must comply with government regulations and understand the political and legal environments in which they do business. Different government agencies enforce the numerous regulations that have been established to protect both consumers and businesses. For example, the “Reopening Ontario Act 2020” (Reopening Ontario Act, 2020) is a new piece of legislation that regulates the opening and operating of business during the various phases of the COVID-19 virus. The “Food and Drugs Act 1985” (Food and Drugs Act, 1985) regulates the labeling of consumable products, such as food and medicine. You can find a number of pieces of legislation, and the names of the agencies that regulate various industries within Canada here.
As explained before, when companies conduct business in multiple markets, they must understand that regulations vary across countries and across states. Many states and countries have different laws that affect a company’s strategy. For example, suppose you are opening up a new factory because you cannot keep up with the demand for your products. If you are considering opening the factory in France (perhaps because the demand in Europe for your product is strong), you need to know that it is illegal for employees in that country to work more than thirty-five hours per week.
The Economic Environment
The economy has a major impact on spending by both consumers and businesses, which, in turn, affects the goals and strategies of organizations. Economic factors include variables such as inflation, unemployment, interest rates, and whether the economy is in a growth period or a recession. Inflation occurs when the cost of living continues to rise, eroding the purchasing power of money. When this happens, you and other consumers and businesses need more money to purchase goods and services. Interest rates often rise when inflation rises. Recessions can also occur when inflation rises because higher prices sometimes cause low or negative growth in the economy.
During a recessionary period, it is possible for both high-end and low-end products to sell well. Consumers who can afford luxury goods may continue to buy them, while consumers with lower incomes tend to become more value conscious. Other goods and services, such as products sold in traditional department stores, may suffer. In the face of a severe economic downturn, even the sales of luxury goods can suffer. The economic downturn that began in 2020 affected consumers and businesses at all levels worldwide. Many consumers reduced their spending, and holiday sales dropped.
The Socio-Cultural Environment
The demographic, social and cultural environment—including social trends such as people’s attitudes toward fitness and nutrition; demographic characteristics such as people’s age, income, marital status, education, and occupation; and culture, which relates to people’s beliefs and values—are constantly changing in the global marketplace. Fitness, nutrition, and health trends affect the product offerings of many companies. For example, PepsiCo produces vitamin water and sports drinks. More women are working, which has led to a rise in the demand for services such as house cleaning and daycare. Baby boomers are reaching retirement age, sending their children to post-secondary education, and trying to care for their elderly parents all at the same time. Companies are responding to the time constraints their buyers face by creating products that are more convenient, such as frozen meals and nutritious snacks.
Let us consider some implications of the changing socio-cultural trends. The example we will consider is the constantly changing composition of the population. Specifically, “the population aged 65 and over will increase by close to 60% over the period 2019-2036 as compared to an increase of under 10% for the younger population. This means that the older households’ share of consumer expenditures will also increase and marketing to the older population will be increasingly important for the bottom line” (Norris, 2020). Similarly, “It is estimated that in 2019 less than 40% of households have children at home. Approximately 28% of households are one-person households and 26% are couples without children. For the future, there is likely to be little change in the number of households with children, while there should be a considerable increase in the number of empty nest couples and perhaps a modest increase in one-person households. Smaller and older households have implications for packaging size as well as the labelling and design of products” (Norris, 2020). ‡
The Technological Environment
The technology available in the world is changing the way people communicate and the way companies do business. Everyone is affected by technological changes. Self-scanners and video displays at stores, Radio Frequency ID (RFID), and Smart devices are a few examples of how technology is affecting businesses and consumers. Many consumers get information, read the news, use text messaging, and shop online. As a result, marketers have begun allocating more of their promotion budgets to online ads and mobile marketing, rather than just to traditional print media such as newspapers and magazines. Applications for telephones and electronic devices are changing the way people obtain information and shop, allowing customers to comparison shop without having to visit multiple stores. Many young people may rely more on electronic books, magazines, and newspapers and depend on mobile devices for most of their information needs. Organizations must adapt to new technologies in order to succeed.
The Competitive Environment
When analyzing the competitive environment from a macro environment perspective, it is important to understand that it is about the competitiveness of the industry and not about individual competitors per say. Individual competitors are considered during the micro environment analysis in determining whether individual competitors have company (resources or capabilities) and or corporate partnerships that are better or worse than the company being analyzed. In the macro environment, the competitive environment as a whole is analyzed (not individual competitors). How intense is the competition in a particular industry? Is most of the revenue within the industry concentrated within a small number of competitors who have a stronghold on that market, or is it more distributed amongst a number of small competitors, with no one competitor maintaining a stronghold. ‡
A group of competitors that provide similar products or services form an industry. Michael Porter, a professor at Harvard University and a leading authority on competitive strategy, developed an approach for analyzing industries. Called the five forces model (Porter, 1980) and shown in Figure 2.4 “Five Forces Model”, the framework helps organizations understand their current competitors as well as organizations that could become competitors in the future. As such, companies can find the best way to defend their position in the industry.
According to Porter, in addition to their direct competitors (competitive rivals), organizations must consider the strength and impact the following could have (Porter, 1980):
- Substitute products
- Potential entrants (new competitors) in the marketplace
- The bargaining power of suppliers
- The bargaining power of buyers
When any of these factors change, companies may have to respond by changing their strategies. For example, because buyers are consuming fewer soft drinks these days, companies such as Coke and Pepsi developed substitute offerings such as vitamin water and sports drinks. Other companies such as Danone or Nestlé subsequently entered the flavored water market. When you select a hamburger fast-food chain, you also had the option of substitutes such as getting food at the grocery or going to a pizza place. When laptop computers entered the market, they were a substitute for desktop computers. Most students may not have ever used a desktop computer, but some consumers still use them.
Suppliers, the companies that supply ingredients as well as packaging materials to other companies, must also be considered. If a company cannot get the supplies it needs, it’s in trouble. Also, sometimes suppliers see how lucrative their customers’ markets are and decide to enter them. Buyers, who are the focus of marketing and strategic plans, must also be considered because they have bargaining power and must be satisfied. If a buyer is large enough, and doesn’t purchase a product or service, it can affect a selling company’s performance. Walmart, for instance, is a buyer with a great deal of bargaining power. Companies that do business with Walmart must be prepared to make concessions to them if they want their products on the company’s store shelves.
Lastly, the world is becoming “smaller” and more of a global marketplace. Companies everywhere are finding that no matter what they make, numerous companies around the world are producing the product or a similar offering (substitute), and are eager to compete with them. Employees are in the same position. The Internet has made it easier than ever for customers to find products and services and for workers to find the best jobs available, even if they are abroad. Companies are also acquiring foreign companies. These factors all have an effect on the strategic decisions companies make.
Figure 2.5 “Considerations in the Macro Environment” provides an illustrative (not exhaustive) list of aspects to consider in the various macro environments as a summary.
Conducting a SWOT Analysis
Now that data has been gathered about both the micro and macro environments, it becomes important to make sense of this information. A common methodology used to make sense of the information gathered about the business environment is called SWOT analysis. SWOT stands for Strengths, Weakness, Opportunities and Threats. It is a strategic planning methodology developed out of Stanford University in the 1960’s that is still widely taught and used amongst business schools. It helps to organize thoughts to develop goals and strategies. ‡
Before starting the process of evaluating the data collected from the micro and macro environments, it is important to keep the decision or action to be taken top of mind as you conduct your SWOT analysis (more on this to come). With the decision or action required top of mind, it is necessary to consider the data collected and determine if each piece of information or point is considered a strength or weakness of or an opportunity or threat to the business. ‡
In determining whether a data point is a strength, weakness, opportunity or threat, there are a number of criteria to consider. See figure 2.6 “Criteria for Determining SWOT”. Begin by considering each data point collected in the situation analysis. For each point, determine if each of the three criteria from the strength and weakness box in figure 2.6 or the criteria from the opportunities and threats box apply to the point. For example, let’s say the decision to be considered was whether or not Apple should enter the electric car market. One of the data points collected in a situation analysis was that Apple has a strong brand reputation. In considering the three criteria from figure 2.6, this point about brand reputation is 1) about Apple which is the company being analyzed, 2) brand reputation is within the control of Apple and 3) in comparison to the competition, Apple’s brand reputation for quality products is much better than most auto maker competitors. Therefore, because Apple’s brand reputation is better than the competition, we consider it a strength. If the brand reputation was the same as their competitors, this point would not be considered a strength or weakness. This data point could be excluded from further analysis. ‡
Continuing with the same example above, it was determined that many provincial, federal and state governments offer electric car financial incentives or rebates to people who buy them. This point collected about the political/legal/regulatory environment can be said to 1) be external to Apple, 2) is not within the control of Apple and 3) these incentives would continue to exist even if Apple didn’t exist. Therefore, because this is a favourable point, we consider it to be an opportunity.
As was indicated above, when conducting a SWOT analysis, it is important to keep the decision or action top of mind. This is because when determining strengths, weaknesses, opportunities or threats, it is also important to understand the implications (the “so what does this mean”) for the decision or action to be taken. In other words; ‡
- How do you capitalize / leverage the strengths in the decision to be made?
- How do you address / compensate for the weakness in the decision to be made?
- How do you take advantage of the opportunities in the decision to be made?
- How do you mitigate / minimize the threats in the decision to be made?
Continuing with the Apple example above, we mentioned that one of Apple’s strength is that they have a strong brand reputation. While that is a strength, the important part is to understand or communicate how Apple can capitalize or leverage the strength as they consider whether to launch an electric vehicle. One implication could be that Apple could leverage the strong brand reputation in building brand awareness for a new Apple electric vehicle. The reputation for quality and/or superior products would be transferred to the new electric vehicle, and help to stimulate sales with loyal Apple customers for the new electric vehicle. ‡