Environmental Analysis

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USING KM MODEL TO EXAMINE A FORM’S EXTERNAL ENVIRONMENT IN STRATEGIC ANALYSIS Diana Kao, Tony Mao Odette School of Business, University of Windsor, Windsor, Ontario, Canada N9B 3P4 Tel: 1-519-253-3000 ext.5065, E-mail: kao@uwindsor.ca, tmao@uwindsor.ca

Abstract: The sustainability of a firm mainly depends on whether the firm has an effective strategy to align its internal operations with changes in the external environment. This paper introduces the KM model, which is a framework that guides a comprehensive and systematic strategic analysis of a firm. This article focused on using the KM model to examine a firm’s external environment systematically. The KM model divides a firm’s external environment into four interdependent and strategically relevant layers. By understanding the changes and trends in each layer as well as the interactive relationships across these layers, companies could identify the emerging needs and trends in the external environment. The model facilitates an orderly and effective way to identify gaps between a firm’s internal operations and changes in its external environment. The KM model provides a platform for incorporating most existing strategic analysis tools to obtain a comprehensive view of a firm’s external environment, and supports companies to set their global strategic positions accordingly.

INTRODUCTION
Comprehensive and systematic analysis of a firm’s external environment provides management better planning and decision-making capabilities. The formulation of effective strategies often depends on whether a firm’s analysis reflects the changing environment. Many tools have been developed to examine environmental factors in the strategic analysis process. PEST model looks at the political, economical, social and technological factors to analyze the macroeconomic situation of the firm (Narayanan and Fahey, 2001). Porter’s five forces model analyzes a firm’s industry by looking at other existing companies, potential new companies, substitutes for products, suppliers and customers (Porter, 1979). Porter’s value chain identifies a firm’s primary and support activities. The fundamental principle of the model is that primary and support activities contribute to both firm’s costs as well as the ability for a firm to deliver value to its customers (Porter, 1985). SWOT framework identifies a firm’s strengths, weaknesses, opportunities and threats. Blue ocean strategy argues that firms employing a blue ocean strategy are deliberately redefining existing industry boundaries and creating uncontested market spaces as a source of competitive advantage. It suggests that firms engaging in blue ocean strategy see the barriers to competition are not only surmountable, but also present opportunities for untapped revenues (Kim and Mauborgne, 2005). The Diamond-E framework emphasizes that a firm’s successful performance depends on having high consistency among the firm’s internal environment, its strategy and the external environment (Fry and Killing, 1989). Crossan et. al. (2009) introduced a five-step framework to conduct environmental analysis. Mao and Kao (2008) proposed the KM model as a framework to guide systematic and comprehensive strategic analysis. However, increasing global competition, advancement of technology, incomplete information, economical crises and a wide range of uncertainties has made the analysis of the environment more challenging and difficult. Not only it is difficult to identify relevant environmental impacts, practitioners also find it difficult to relate the overall macroeconomic factors directly to the firm’s internal operations. We believe that practitioners would benefit from a framework that will support them to observe and analyze the continuous external changes and trends by 1) defining the relevant macro-environment from the global level to strategically relevant segments in the environment such as the firm’s focused countries, industries and supply chains, 2)...
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