Strategic Management :Unit II

Environmental Scanning Industry Analysis

Competitive Intelligence ETOP Study, OCP, SAP Scanning,

Corporate Analysis, Resource based approach,

Value-Chain Approach Scanning Functional Resources, Strategic Budget and Audit

The role of environment and its components are very important for business firm as all the objectives and goals of the firm lie in the environment. The success and achievements of the firm are the outcomes of its interactions with the environment. Better the interactions better the results and performance of the firm and vice-versa. Better interactions needs better understanding of environment so that internal capabilities are perfectly matched with external opportunities and threats. The major challenge of environment to a business firm is its dynamism.

Environmental Scanning: The study of all components of external environment is termed as environmental scanning. Through scanning a firm can be aware of:

1. Early signals of potential changes.2. Changes which are already going on.3. Strategies of Competitors.4. Counter strategies to be adopted.

Strategy is a game plan for action i.e. the way of doing something.

It usually includes the formulation of Goal and set of Action plans for

achievement of goal under competitive environment and against competitive

forces Strategy is the firm’s response and pattern of responses towards

outside forces. The organizational goals as stated during planning stage are to

be achieved under threats and opportunities conditions created by outside forces.

Emergent Strategies

Planning Intended Ways Goal

Counter Strategies

The concept of strategy has its roots in military and armed forced. The

actions and reactions of the outside forces are the heart of modern approach

of strategy. Under competitive environment wherever the plans are

implemented they are countered by these forces. The actions / reactions of

the outside forces generate emergent strategies of the organization and

followed by counter strategies on a continuous basis like a chain reactions.

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Competitive and market analysis is also important part of strategy

formulation. A successful analysis of competitive and market analysis help

organization to develop its own “Sustainable Competitive Advantage” which

prove to be a “Distinctive Competence” (DC) or uniqueness over

competitors and market. Once the above objectives / steps are completed the

role of H.R. began to acquire and develop the personnel of organization to

achieve the D.C. through integrative efforts of different departments.

Examining and Dealing with Environments for Strategic HRM:

Although, the future is not perfectly predictable, but a close watch over the environmental forces and responding well a organization can visualize “most probable” outcomes. A HR manager who is fail to visualize the opportunities and threats created by marketing environment is said to be ineffective. Thus, obtaining information, having a close watch over external forces and responding well is the basic purpose of this chapter / topic. Environmental Monitoring Scanning and Analysis are best tools to respond and key success parameters.

Environmental Scanning is the process of collecting informations about the forces in the marketing environment, scanning involves observation, perusal of secondary source of dates (Business, Trade and Government) and research efforts. Environmental Analysis is the process of assessing and interpreting the informations gathered through scanning. This help to predict future and create strategies. The potential threats and potential opportunities can be visualized through Environmental Scanning and Analysis.

Responding to Environmental Forces: An Strategic Approach:

There are two general approaches to respond environmental forces:

1. View Environmental Forces as totally uncontrollable and difficult to predict:

Here, the organization adopts a passive and reactive approach to respond i.e. organization does not try to influence the different forces but try to adjust the affect of forces.

2. View Environmental forces as challenges and taking aggressive stands i.e. reactive and proactive approach:

HR manager can use the porter model of 5 forces to evaluate the outside forces which may guide HR department for creating HR strategies.

Threats of Potential Entrants

Bargaining Power of Suppliers

Industry Environment

s

Bargaining Power of

Customers

Threats of Substitute Products / Services

Industry Analysis: A particular industry is said to be a market where various firms are pursuing their strategies to compete with similar offerings and enjoying their own market

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share, product acceptability, competitive position, brand loyalties, and profitability are the results of their strategies and competitors strategies.. A continuous watch over the market is must to grow, sustain, and survive in the dynamic environment. There are two basic aims behind strategic industry analysis:

1. Analysis of relevant industry, its components, degree and nature of competitiveness i.e. opportunities & threats.

2. Analysis of available internal resources, competencies, strengths and weakness.

Strengths

Opportunities Threats

Weakness

The environments of industry to industry is quit different. A firm operating in a particular industry generally has following environment components:

Micro Environment OR

Immediate Environment

Mega Environment

1. The Mega Environment: Consists of following:

- Demographic- Political- Legal- Social- Cultural- Economic

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Firm

2. The Micro Environment or Immediate Environment: There is a very thin line difference between the firm and its micro environment. Within micro environment there may be different industries consisting of various competitors.For Exp: Within cement industry there are various competing firm, the immediate or micro environment of cement industry may consists of firms’ manufacturing and marketing steel, iron bricks, etc. If a firm of cement industry lower down its prices the iron and steel industry will automatically be affected likewise the micro environment of Tea industry is coffee and sugar industry.

.Threats of Potential Entrants

Bargaining Power of Suppliers

Industry Environment

s

Bargaining Power of

Customers

Threats of Substitute Products / Services

3. The Technological Environment: Within any industry or society there are direct and indirect interactions involved in developing new things, new ideology, innovations, research & development, new process, new or substitute products , cheaper substitute of raw materials more ever the Govt. Policies and MNC’s always bring new technology and better concepts to produce and market products/services. The rise of new technologies , new industries emerged which consumes the purchasing power of customers such as Biotech, genomics, voice recognition software, Biodegradable plastics, genetics and internet.

The Competitive Environment of an Industry refers to the various external forces which make a particular Industry – Attractive or Unattractive. Industry Attractiveness refers to Profit Potentials and Growth Potential. The most common tool to analyze the Industry is Porter’s 5 Forces Model.

Strategic Groups and Industry Environment:

Under intense competition a firm must choose unique pattern of its functions related to marketing, pricing, product attributes & positioning, segmentation and other strategies. Under competition firm’s own behavior must be different from its rivals.

Within a industry there are various segments of customers by virtue of their purchasing power, preferences, consumption pattern etc. On the basis of aggregate consumer behavior within a particular industry we can group the entire customers into different parts. For Exp. For a car industry 60% customers are price sensitive, 15% are status conscious, 5% choose

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the most luxury car with multiple comforts. On the basis of above classification firms of the industry design their products and other Ps strategically to suit and match the requirements of a particular customer class.

Implications of Strategic Groups within Industry

Analysis of Strategic Group within an industry provides useful informations as under:1. There are different strategic groups within an industry and the firms presuming same

strategies are comparatively close and facing intense competition.2. Members of one strategic group pose high challenges and threats to each other and

hence their decisions and strategies are not independent.3. There are chances of price war between members of one strategic group.4. Members of different strategic groups are not directly affected by each other and

hence their decisions and strategies are independent.5. A very strong brand and customer loyalties of a particular firm creates a very high

entry barrier to the members of other strategic group.6. There is a strong impact of environment on different strategic groups and sometime

only a few firm or groups are influenced by environmental changes.7. The position of firms within a group is dynamic and likely to change due to

environmental change, or strategies of other firms.

Industry Analysis:

SWOT Analysis (Strength, Weakness, Opportunities and Threats Profile)

As the firm operates under dynamic environment and strategic fit of internal strengths and weaknesses with external opportunities and threats is a must and a matter of constant and regular exercise of the firm. Without this a firm can not be able to create a perfect match of its capabilities with external demands. The approach to match internal capabilities with environmental opportunities and threats are known as SWOT analysis. The basic aim of SWOT is to provide an insight to the managers the abilities of the firm (Strength and Weakness) in terms of handling opportunities and threats. The SWOT provides a framework within which a firm can develop and alter its strategies and shape the actions of functional and other levels of firms.

Internal analysis reveals the strength and weaknesses of the organization in term of its internal capabilities, competencies, efficiencies, financial position, track record, experience.

Strengths: are resources, skills or other advantages relative to competitors. Strength is a DC that gives a firm comparative advantage in the market and competition.For Exp. Financial Resources, image, market leadership etc.

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Weaknesses: limitations or deficiencies in resources, skills and capabilities of the firm that seriously affect the firm’s performance under competition i.e. Disadvantages.

Opportunities: Major favorable situations in the firm’s environments. Opportunities may occur due to poor performance of competitors, consumer demand shift, government policies, unique raw materials, technological changes, better buyer-supplier relationships etc.

Threats: major unfavorable situations in the firm’s environment which may affect firm’s current and potentials performance. A particular threat may be an opportunity for competitor and vice versa.

Strategic Management Process:

Analysis of Internal Environment for Strength and WeaknessExternal Environment for Opportunities and Threats

Formulation and Statement of

Vision, Mission The ultimate goalsObjective Market to CompeteStrategies & Competencies to develop Policies and major Actions

Implementation of best fit organization structure, resources, culture and operation control.

Evaluation & Control

Developing counter strategies if necessary.

Effectiveness of HR, level of commitments, loyalties (all quantitative and qualitative) to compete with the rival firms within industry are counted as Strength. Firm’s weaknesses are internal deficiencies in term of above. The deficiencies are regarded as organizational constraints and disadvantages to compete and fight with rival firms. When a firm analyzes its internal capabilities as stated above the process is known as SAP (Strategic Advantage Profile).

On the other hand , analysis of external environment to find out opportunities and threats are known as ETOP Analysis (Environmental Threats and Opportunities Profile). Thus we can say SWOT is a function of SAP & ETOP.

Implications of SWOT Analysis:

1. SWOT provides the basis for exploiting the opportunities out of its internal strengths and capabilities. These Strategies are called as Exploitative or Developmental Strategies.

2. Environmental– Threats and their impacts can be minimize through minimum exposures of weaknesses – these strategies are called Blocking strategies.

3. If firm is able to recover and repair its weaknesses –these strategies are called as Remedial Strategies.

STRENGTHS OPPORTUNITIES

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- Clear vision & Mission - Increasing Income- Better Financial Position - Better Education- Better Track Record - Developed Society- State of Art Technology - Govt. Support-Better Network for Marketing - Absence of Strong

Competitors- Un-served Market Segmentation

WEAKNESSES THREATS

- Poor Selling & Marketing Team - Potential Rivalry- Poor Strategies - High Rate of Tech.- Weak Customer Services in Future- Poor Understanding with channel members - MNCs Threats due

to Policies of Govt.

Fig:SWOT Model

4. Cost Efficiencies Strength of a firm can be used to increase market share through appropriate pricing strategy.

5. Firm’s internal and external situations and its strategic match can put the firm in a unique position in market.

6. As stated above SWOT provides a strategic framework to firm within which it can plan to compete in market. As shown in the figure below, there are 4 cells – representing respective strategies.

Various Opportunities

CELL – 3 CELL – 1

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Turnaround Aggressive Growth OrientedStrategy Strategy i.e. Offensive Strategies

Comparative Internal Substantial Weakness Strength

CELL – 4 CELL – 2

Defensive Diversification & Defensive Strategies Strategies

Major Environmental Threats

CELL – 1: Represent most favorable situation with various opportunities and firms internal Strengths. Under these situations a firm can choose aggressive growth oriented strategies.

CELL – 2: Shows the mixed situation with substantial internal strengths to face major environmental threats. Firm’s strength can be used to exploit long term opportunities and to cop with threats.

CELL – 3: Various opportunities are there but the firm is unable to cash due to its internal weaknesses.

CELL – 4: is just opposite to the cell -1 i.e. most unfavorable situation under these condition withdrawal or reduced operations is suggested in product market.

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SAP Analysis:

Internal assessment of the firm is critical for developing successful business and better strategies. Internal analysis began with the identification of organization’s resources allocations. Resources allocation convert financial resources into organizational, Human and Physical resources and ultimately into the ability to interact and compete in the market. Successful market interaction generates great financial resources which are again converted into Human and other Physical resources with greater abilities to fight in the market. This is like a chain reaction of firm’s internal resources to generate and re-generates greater amount of financial, physical, Human (tangible resources) and better capabilities to compete in the market with added strength as show in the figure below.

SAP is the process by which firm’s resources and capabilities of key functional areas are examined to determine its strengths and weaknesses.

The key functional areas may be:

1. Organization Itself- Culture- Form and Structure- Top Management Skills & Interests- Planning System

2. Personnel (HR) Or Human Capital

- Attitude- Skills- Competencies- Loyalties- Perceptions

Internal Analysis for SAP and Resources Conversion Process

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Firm’s Financial Resources

Organization’s H.R.Resources

Organization’s Physical Resources

Greater Financial Resources

Reallocation and Greater Capabilities to compete i.e. STRENGTH

3. Marketing - Size of the Sales Force- Product Quality- Image- Product Line- Customer Services

4. Technical- Production Facilities- Production Techniques- Product Development abilities/skills- R & D

5. Finance- Financial Strength- Potential Financial Strength- Revenue Potentials

By analyzing the above a firm is in a position to decide its “Competitive Advantages” and “Distinctive Competencies (DC or Uniqueness) over competitors in the market. Internal analysis consists of examining “Qualitative and Quantitative” resources viewing all available resources in term of “Tangible Resources” and “Intangible Resources”.

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Steps in Developing Firm’s SAP

Step – 1

Step – 2

Favorable Unfavorable

Strength Weakness

Step – 3

Provide an edge Necessary Skills/ Necessary Skills Over competitors other Requirements and other require-

ments are notpossible

Competitive Basic Business Competitive Advantages Requirements Disadvantages

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Identification of Strategic internal factors and value activities

How do these activities and factors fit with current conditions and firm’s past history of performance?

How do these Strength & Weakness can be utilize to compete in market

How do these Strength & Weakness compare with capabilities and resources of main competitors?

Necessary inputs available for strategy formulation Step 4

The Value Chain Approach:

The value chain approach to diagnose firm’s key strengths and weakness was developed by Michael Porter. Value chain is an excellent framework by which a firm can determine its strengths and weaknesses through parts of its operations that create value and those do not. A firm can earn above-average return only when the value it creates is greater than the costs incurred to create that value. The value chain analysis is a systematic way to analyze the series of activities a firm perform to provide a product to its customers. The value chain disaggregates a firm into its activities in order to understand the behavior of the firm cost and its existing or potential source of differentiation (competitive edge over competitors). The disaggregated activities are called as “Key internal factors” – more cheaper or better than its competitors. As shown in the figure the firm value chain is divided into two types of activities.1. Primary Activities:

These activities are involved in products physical creation, its sales and distribution to customers, marketing, and after sales support.

2. Support Activities:

Which provide inputs, infrastructure and assistance to primary activities to take place.

SUPPORTIVE ACTIVITIES

Firm Infrastructure H.R. Management Technological Development Margin Procurement

Margin

PRIMARY ACTIVITIES

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The value chain shows how the raw materials are converted into final products and marketed. It is vary apparent that human skills, knowledge and willingness in involved at every part of the chain.

Using value chain analysis a firm can identify its strengths in terms of “ Core Competencies”, Key Result Areas (KRAs), and DCs.

The term margin which covers both primary activities and supportive activities in the figure denotes how an organization is capable to generate profit margin with the linkage of both the activities.

Resource Based Approach of Internal Analysis(Care: Before Value Chain)

Success of a business firm heavily depend how well firm have a set of DC and resources which are significantly different from those of its competitors. For a successful corporate strategy a firm has to identify resources that systematically distinguished the firm in a way that no other competitor can easily imitate or duplicate (assets, skills, technologies, capabilities etc.). The resources based approach to analyze firm’s suggest that the available resources must be unique in term of:

1) Quantity, quality, durability2) Not easy to imitate or duplicate3) Highly specialized and durable (such as brand

name and patent)

Such a unique mix of resources provides long term sustainability and competitive edge over its competitors. Following figure shows the Resources Competencies Framework which enables a firm to show its strategic capabilities and competencies over competitors.

Easy to Imitate Difficult to Imitate

Same as Competitors Better than Competitors

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Necessary Unique Resources Resources

Threshold Core Competencies Competencies

Com

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Value chain analysis is one of the best resource based internal analysis tool.

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ETOP Analysis:

A profile of environmental threats and opportunities is considered to be a very useful device and is a summarized depiction of environmental factors and their impact on future functions of firm under competitive environment. The environment is a significant source of change and is highly dynamic in nature. Some organizations become victim of the change and dynamism of environment.

Basic Characteristics of Environment:

1. Uniqueness2. Dynamic in Nature3. Variability of Control4. Environment Carries Risk, Uncertainties and Opportunities

On the basis of impact on a business house we can divide the environment into 4 categories:

1. The Mega Environment or Broader Environment:a) Demographic Factorsb) Political Factorsc) Legal & Regularityd) Socio-Culturale) Economic

2. The Micro or Immediate Environment or Industry Environment:

This environment and its components are very close to the firm; in fact the firm operates within this environment. Therefore, the intensity of negative or positive effects are directly hit the firm and its strategies/decision making. Porter Model of 5 Forces is the best tool to evaluate this environment.

Porter’s 5 Forces Effects on Industry Profitability and Functioning

High Rivalry Low Profitability

High Power of Suppliers Low Profitability

Low Power of Buyers High Profitability

Threats of Potential Rival- High Low Profitability in Future and UnattractiveIndustry

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Threats of Substitutes Low Profitability

3. The Technological Environment:

Cut & paste from unit I

4. Global Environment

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