Module:II

General Environment

By: D.Goutam

Environmental Scanning:

Environmental Scanning is monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation uses this tool to avoid strategic surprises and ensure its long-term health.

Identifying External Environmental Variable:

In understanding environmental scanning, strategic managers must first be aware of the many variables within in a corporation's social and task environments. The social environment includes general forces that do not directly touch on the short-run activities of the organization but that can, often do, influence its long-run decisions

Socio Environment:

Economic Factors: EF That regulate the exchange of materials, money, energy, and information

Social Factors: SF that regulate the values, morels, and customs of society

Political Factors: PF that allocate power & provide constraining & protecting laws and regulations

Technological Factors: TF that generate problem –solving inventions

Sources of information include:

◦Internet◦Libraries (corporate, university, public)◦Suppliers◦Distributors◦Customers◦Competition

Economic Variables:

GDP Trends Inflation rates Interest Rates Money Supply Unemployment Levels Wage/ price control Devaluation/Revaluation Energy Availability and cost Disposable Income Discretionary Income

Major impact on:

◦Products◦Services◦Markets◦customers

Social Factors

Present in the external environment:◦ Beliefs & Values, Attitudes & Opinions, Lifestyles changes◦ Career expectations, Consumer Activision, Rte of family

formation, Growth rate of population, Age distribution of population, Regional Shifts in population

◦ Life expectation Birth rates

Developed from:◦ Cultural conditioning◦ Demographic ◦ Religion◦ Education◦ Ethnic conditioning.

Political Variables

Political constraints on firms:

• Antitrust regulations• Environmental protection laws• Tax Laws• Special Incentives • Foreign Trade Regulation• Attitude towards foreign companies• Laws on hiring and promotion • Stability of Goveronment

Technological Variables:

Changes in the technological part of the social environment can also have a great impact on multiple industries.

Ex: Improvements in computer microprocessor have not only led to the widespread use of home computers, but also to better automobile engine performance in terms of power & fuel economy through the use of microprocessor

Variables : Total Govt. spending for R&D Total Industry spending for R&D Focus of technological efforts Patent protection New Products Productivity improvements through

automation Internet availability Telecommunication infrastructure

Internet changes the nature of opportunities and threats –

Alters life cycle of products Increases speed of distribution Creates new products and services Eases limitations of geographic markets Alters economies of scale Changes entry barriers

Example of the Impact of Wireless Technology

Airline-Many airlines now offer wireless technology in flight

Banking- VISA sends text msg. alerts after unusual transactions.

Health Care- Patients use mobile devices to monitor their own health, such as calories consumed.

Some Important Variables in International Societal Environment:

EconomicEconomic DevelopmentPer capita income Climate GDP trends Monitory and fiscal policiesUnemployment levelCurrency convertibilityWage levelsNature of competitionMembership in regional economic association

Technological:

Regulation on technology transfer Energy availability/cost Natural resource availabilityTransportation networkSkill level of workforcePatent trade mark protectionInternet availabilityTelecommunication infrastructure

Political-Legal:

Form of Govt.Political IdeologyTax lawsStability of Govt.Govt. attitude towards foreign companiesRegulations on foreign ownership of assetsStrength of opposition groupTrade regulationsProtectionist sentimentForeign policiesTerrorist activityLegal system

Socio-Culture:

Customs, Norms, ValuesLanguagesDemographicLife expectationsSocial institutionsStatus symbolLifestyleReligious believes Attitude towards foreignerLiteracy levelHuman rightsEnvironmentalism

Task environment

A corporation's scanning of the environment will include analysis of all the relevant elements in the task environment

These analysis take the firm of individual reports written by various people in different parts of the firm.

Ex; Procter & Gamble People from each of the brand management teams

work with key people from the sales and market research departments to research & write a “competitive Activity Report” each quarter on each of the product categories in which P&G competes.

People in purchase also writes reports and send it to P&G---Summarize---Top Level Mgnt---Decision Making process

Scanning the external Environment

Analysis of societal Environment (PEST)

Interest Group

Analysis

Supplier Analysis

Competitor Analysis

Market Analysis

Community Analysis

Govt. Analysis

Selection of Strategic

FactorOpportunities Treats

Identifying External Strategic Factor:

This willingness to reject unfamiliar as well as negative information is called myopia (changing the direction) . If a firm needs to change its strategy, it might not be gathering the appropriate external information to change strategies successfully.

One way to identify and analyze developments in external environment is to use the issues Priority Matrix

Issues Priority MatrixProbable impact on Corporation

High Medium Low

High

Medium

Low

Medium Priority

Low Priority

Low Priority

High PriorityHigh Priority

Low PriorityMedium Priority

High PriorityMedium Priority

Probability

of Occurance

Competitive Forces

Collection and evaluation of information on competitors is essential for successful strategy formulation

Competition in virtually all industries can be described as intense.

Competitive Forces

Identifying rival firms• Strengths• Weaknesses• Capabilities• Opportunities• Threats• Objectives• Strategies

Competitive Forces

Key Questions About Competitors:• Their strengths• Their weaknesses• Their objectives and strategies• Their responses to all external variables (e.g.

social, political, demographic, etc.)• Their vulnerability to our alternative strategies

Conti….

• Our vulnerability to successful strategic counterattack

• Our product and service positioning relative to competitors

• Entry and exit of firms in the industry• Key factors for our current position in

industry

Conti..

• Sales and profit rankings of competitors over time

• Nature of supplier and distributor relationships

• The threat of substitute products or services

Competitive Intelligence Programs:

Systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’ own goals.

Industry Environment Harvard professor Michael E. Porter propelled the

concept of industry environment into the foreground of strategic thought and business planning.

The cornerstone of Porter’s work first appeared in the Harvard Business Review, in which he explains the five forces that shape competition in an industry.

Porter’s well-defined analytic framework helps strategic managers to link remote factors to their effects on a firm’s operating environment.

Competitive Forces Shape Strategy

The essence of strategy formulation is coping with competition.

Intense competition in an industry is neither coincidence nor bad luck.

Competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry.

The corporate strategists’ goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor.

Forces Driving Industry Competition

Contending ForcesThreat of Entry Economies of Scale Product Differentiation Capital Requirements Cost Disadvantages Independent of Size Access to Distribution Channels Government Policy

Powerful Suppliers

A supplier group is powerful if: It is dominated by a few companies and

is more concentrated than the industry it sells to

Its product is unique or at least differentiated, or if it has built-up switching costs

It is not obliged to contend with other products for sale to the industry

It poses a credible threat of integrating forward into the industry’s business

The industry is not an important customer of the supplier group

Powerful Buyers

A buyer group is powerful if: It is concentrated or purchases in large volumes The products it purchases from the industry are standard The products it purchases from the industry form a

component of its product and represent a significant fraction of its cost

It earns low profits The industry’s product is unimportant to the quality of the

buyers’ products or services The industry’s product does not save the buyer money The buyers pose a credible threat of integrating backward

Substitute Products By placing a ceiling on the prices it can charge,

substitute products or services limit the potential of an industry

Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times

Substitute products that deserve the most attention strategically are those that are

◦ subject to trends improving their price-performance trade-off with the industry’s product or

◦ produced by industries earning high profits

Competing for Position

Intense rivalry occurs when: Competitors are numerous or are roughly equal Industry growth is slow, precipitating fights for market share

that involve expansion The product or service lacks differentiation or switching

costs Fixed costs are high or the product is perishable, creating

strong temptation to cut prices Capacity normally is augmented in large increments Exit barriers are high Rivals are diverse in strategy, origin, and personality

Industry Analysis & Competitive Analysis

An industry is a collection of firms that offer similar products or services.

Structural attributes are the enduring characteristics that give an industry its distinctive character.

Concentration refers to the extent to which industry sales are dominated by only a few firms.

Barriers to entry are the obstacles that a firm must overcome to enter an industry.

Competitive Analysis

1. How do other firms define the scope of their market?

2. How similar are the benefits the customers derive from the products and services that other firms offer? The more similar the benefits of products or services, the higher the level of substitutability between them.

3. How committed are other firms to the industry?

Industry Matrix:

Key success factors: KSF are those variables that can affect significantly the overall competitive positions of all companies within any particular industry. They typically very from industry to industry and are crucial to determining a company’s ability to succeed within that industry (Usually determined by economic and technological characteristics of the industry)

Ex: Wal-Mart- Strong Distribution Channel Key Success factor- Industry Strategic factor - Company

Industry Matrix:Key Success Factors Weight Co. A Rating Co. A Weighted Score Co. B Rating Co. B Weighted Score

1 2 3 4 5 6

Total 1

1.Column List the 8-10 factors that appear to determine current

and expected success in the industry

2. ColumnFrom 1 most important to 0.0 Not important

3. ColumnExamine the particular company within the industry Ex: 5- Outstanding, 4-above avg., 3-evg, 2- Below

evrg., 1- poor

4. Column(Multiple of column 2and 3)

5. Column(as like column 3)

6. Column(column 2nad 5)

Thank You

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