Environmental Scanning Industry Analysis UnitII Prof Shikhar Das

Environmental Scanning & Industry Analysis Unit-II Prof Shikhar Das Srivastava MBA-IInd Semester

What is environmental scanning? Definition: �The process of collecting, analyzing, and distributing information for tactical and strategic purposes

What is 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 as tactic for External Forces � 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.

Strategy act as counter � Emergent Strategies PLANNING Intended Ways GOAL Counter Strategies � 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. � 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.

Responding to Environmental Forces: An Strategic Approach: � 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.

� 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: A manager can use the porter model of 5 forces to evaluate the outside forces which may guide organisation for creating exclusive strategies.

Industry Analysis: The Fundamentals OUTLINE � The objectives of industry analysis � From environmental analysis to industry analysis � Porter’s Five Forces Framework � Applying � Industry industry analysis & market boundaries � Identifying Key Success Factors

The Objectives of Industry Analysis � To understand how industry structure drives competition, which determines the level of industry profitability. � To assess industry attractiveness � To use evidence on changes in industry structure to forecast future profitability � To formulate strategies to change industry structure to improve industry profitability � To identify Key Success Factors

From Environmental Analysis to Industry Analysis The national/ international economy Technology Government & Politics The natural environment THE INDUSTRY ENVIRONMENT • Suppliers • Competitors • Customers Demographic structure Social structure • The Industry Environment lies at the core of the Macro Environment. • The Macro Environment impacts the firm through its effect on the Industry Environment.

The Determinants of Industry Profitability 3 key influences: � The value of the product to customers � The intensity of competition � Relative bargaining power at different levels within the value chain.

What is environmental scanning? How it fits in the planning cycle: � One cycle in the strategic planning process

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 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.

PORTER’S 5 Forces Model Threats of Potential Entrants Bargaining Power of Suppliers Industry Rivalry Threats of Substitute Products / Services Bargaining Power of Customers

The environments of industry to industry is quit different. A firm operating in a particular industry generally has following environment components: Internal Environment Micro Environment Macro/ Mega Environment

� 1. The Mega Environment: Consists of following: � - Demographic � - Political � - Legal � - Social � - Cultural � - Economic � 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.

Demographic Environment � AGE � GENDER � MARITAL STATUS � BIRTH RATE � RELIGION � SOURCE OF LIVELIHOOD AND INCOME � LIFESTYLE AND INTERESTS

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. a car industry 60% customers are price sensitive, 15% are status conscious, 5% choose 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.

Strategic Management Process Analysis of Internal Environment for Strength and Weakness External Environment for Opportunities and Threats Formulation and Statement of Vision, Mission, The ultimate goals, Objective, Market to Compete, Strategies & 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.

SAP � 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. � 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).

� 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

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”.

Steps in Developing Firm’s SAP Step 1 Identification of Strategic internal factors and value activities Step 2 How do these activities and factors fit with current conditions and firm’s past history of performance Favorable Strength Step 3 Provide an edge Over competitors Competitive Advantages How do these Strength & Weakness can be utilize to compete in market Unfavorable Weakness How do these Strength & Weakness compare with capabilities and resources of main competitors? Necessary Skills and other Requirements are not possible Necessary Skills / other Requirements Basic Business Requirements Necessary inputs available for strategy formulation Competitive Disadvantages Step 4

Internal Analysis for SAP and Resources Conversion Process Organization's HR Resources Firm’s Financial Resources Greater Financial Resources Organization’s Physical Resources Reallocation & greater capabilities to compete i. e. STRENGTH

Preparing the Organisational Capability Profile

Preparing the Organisational Capability Profile The organizational capability profile (OCP) is drawn in the form of a chart as depicted in Exhibit 1, which shows a summarized OCP. The strategists are required to systematically assess the various functional areas and subjectively assign values to the different functional capability factors and sub factors along a scale ranging from the values of -5 to +5. A detailed OCP may run into several pages where each of the sub factors constituting the different functional capability factors can be assessed. In this manner a summarized OCP as shown in Exhibit 1 may be prepared.

Exhibit 5. 11 Summarised Form of Organisational Capability Profile Capability factors Weakness Normal Strength -5 0 +5 1. Financial capability factors (a) Sources of funds (b) Usage of funds (c) Management of funds 2. Marketing capability factors (a) Product-related (b) Price-related (c) Promotion-related (d) Integrative and systematic

Exhibit 5. 11 Summarised Form of Organisational Capability Profile …Contd. Capability factors Weakness Normal Strength -5 0 +5 3. Operations capability factors (a) Production system (b) Operations and control system (c) R&D system 4. Personnel capability factors (a) Personnel system (b) Organisational and employee characteristics (c) Industrial relations

Exhibit 5. 11 Summarised Form of Organisational Capability Profile …Contd. Capability factors Weakness Normal Strength -5 0 +5 5. Information management capability factors (a) Acquisition and retention of information (b) Processing and synthesis of information (c) Retrieval and usage of information (d) Transmission and dissemination of information (e) Integrative, systemic, and supportive 6. General management capability factors (a) General management system (b) External relations (c) Organisational climate

Exhibit 5. 11 Summarised Form of Organisational Capability Profile …Contd. After the completion of the chart, the strategists are in a position to assess the relative strengths and weaknesses of an organisation in each of the six functional areas and identify the gaps that need to be filled or the opportunities that could be used. The preparation of an OCP provides a convenient method to determine the relative priorities of an organisation vis-àvis its competitors, its vulnerability to outside influences, the factors that support or pose a threat to its existence, and its overall capability to compete in a given industry.

ENVIRONMENT THREAT AND OPPORTUNITY PROFILE (ETOP)

CONTENT ØDefinition of environment ØOverview of environment scanning ØTechniques of environment scanning

DEFINITION Environment means the surroundings, external objects, influences or circumstances under which someone or some thing exits.

ENVIRONMENTAL SCANNING Environmental scanning is a process of gathering, analyzing, and dispensing information for tactical or strategic purposes.

TECHNIQUES OF ENVIRONMENT SCANNING §SWOT §ETOP

ETOP It is a process of dividing the environment into different sectors and then analyzing the impact of each sector on the organization.

Environmental sectors Nature of impact Impact of each sector Growing affluence among ETOP FOR BICYCLE COMPANY urban consumers, rising Economic disposable incomes & living standards. Market Organized sector a virtual oligopoly with 4 major manufacturers, buyers critical & better informed, overall industry growth rate not encouraging, growth rate for niche market like sports, trekking etc is high. International Global imports growing but India’s share shrinking, major importers are the US & EU but India exports mainly to Africa.

Political Bicycle principal mode of transport for low & middle income, Industry too small to draw attention. Regulatory Parts & components reserved for SSI, bicycle industry a thrust area for exports, Social Environment & health friendly transport option, wide usage, as recreation, convenient in traffic, customers preference

Supplier Mostly ancillaries in smallscale sector supply parts & components, rising steel prices, industrial concentration in Punjab & Tamilnadu. Technological Up gradation in progress, import of machinery simple, product innovations ongoing like battery operated & lightweight foldable cycles

CONCLUSION ETOP provides a clear picture to the strategists about which sectors & different factors in each sector, have a favorable impact on the organization.

Key Internal Forces � Distinctive competencies ◦ A firm’s strengths that cannot be easily matched or imitated by competitors � Building competitive advantages involves taking advantage of distinctive competencies.

The Process of Performing an Internal Audit � The internal audit ◦ Requires gathering and assimilating information about the firm’s management, marketing, finance/accounting, production/operations, research and development (R&D), and management information systems operations ◦ Provides more opportunity for participants to understand how their jobs, departments, and divisions fit into the whole organization

The Resource-Based View (RBV) � The Resource-Based View (RBV) approach ◦ contends that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage

The Resource-Based View (RBV) � Proponents of the RBV contend that organizational performance will primarily be determined by internal resources that can be grouped into three all-encompassing categories: physical resources, human resources, and organizational resources

Scanning Functional Resources � The functions of management consist of five basic activities: planning, organizing, motivating, staffing, and controlling. � These activities are important to assess in strategic planning because an organization should continually capitalize on its management strengths and improve on its management weaknesses.

The Basic Functions of Management

Marketing � Marketing ◦ the process of defining, anticipating, creating, and fulfilling customers’ needs and wants for products and services

Functions of Marketing Customer analysis Selling products/services Product and service planning Pricing Distribution Marketing research Opportunity analysis

Marketing � Customer analysis ◦ the examination and evaluation of consumer needs, desires, and wants ◦ involves administering customer surveys, analyzing consumer information, evaluating market positioning strategies, developing customer profiles, and determining optimal market segmentation strategies ◦ essential in developing an effective mission statement

Product and Service Planning � Product and service planning ◦ includes activities such as test marketing; product and brand positioning; devising warranties; packaging; determining product options, features, style, and quality; deleting old products; and providing for customer service ◦ important when a company is pursuing product development or diversification

Pricing � Five major stakeholders affect pricing decisions: consumers, governments, suppliers, distributors, and competitors � Sometimes an organization will pursue a forward integration strategy primarily to gain better control over prices charged to consumers

Distribution � Distribution ◦ includes warehousing, distribution channels, distribution coverage, retail site locations, sales territories, inventory levels and location, transportation carriers, wholesaling, and retailing ◦ especially important when a firm is striving to implement a market development or forward integration strategy

Marketing Research � Marketing research ◦ the systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods and services ◦ can uncover critical strengths and weaknesses

Cost/Benefit Analysis Three steps are required to perform a cost/benefit analysis: 1. compute the total costs associated with a decision, 2. estimate the total benefits from the decision, 3. compare the total costs with the total benefits.

Finance/Accounting Functions The functions of finance/accounting comprise three decisions: 1. the investment decision 2. the financing decision 3. the dividend decision Copyright © 2013 Pearson Education 459

Finance/Accounting Functions � Investment decision ◦ the allocation and reallocation of capital and resources to projects, products, assets, and divisions of an organization � Financing decision ◦ determines the best capital structure for the firm and includes examining various methods by which the firm can raise capital Copyright © 2013 Pearson Education 460

Finance/Accounting Functions � Dividend decisions ◦ concern issues such as the percentage of earnings paid to stockholders, the stability of dividends paid over time, and the repurchase or issuance of stock ◦ determine the amount of funds that are retained in a firm compared to the amount paid out to stockholders Copyright © 2013 Pearson Education 461

Production/Operations � Production/operations function ◦ consists of all those activities that transforms inputs into goods and services � Production/operations management deals with inputs, transformations, and outputs that vary across industries and markets.

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.

� Value chain analysis (VCA) ◦ refers to the process whereby a firm determines the costs associated with organizational activities from purchasing raw materials to manufacturing product(s) to marketing those products ◦ aims to identify where low-cost advantages or disadvantages exist anywhere along the value chain from raw material to customer service activities

� 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. 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.

VALUE CHAIN MODEL SUPPORTIVE ACTIVITIES After Sales Service Marketing Activities Outbound Logistics Operations Inbound Logistics IN G AR PRIMARY ACTIVITIES M Firm Infrastructure H. R. Management Technological Development Procurement M R A N I G

Strategic Budget and Audit �A strategic audit is an examination and evaluation of areas affected by the operation of a strategic management process within an organization. A strategy audit may be needed under the following conditions: 1. Performance indicators show that a strategy is not working or is producing negative side effects. 2. High-priority items in the strategic plan are not being accomplished. 3. A shift or change occurs in the external environment. 4. Management wishes: � (1) to fine-tune a successful strategy and � (2) to ensure that a strategy that has worked in the past continues to be in tune with subtle internal or external changes that may have occurred.

�o aid in control, firms will occasionally perform audits to ensure that certain aspects of their operations are in order. Such audit may include operational audits (assessing the firm's operating health) and strategic audits (assessing the firm's strategic health). � Measures or indicators of a firm's current operating and strategic health are shown in Table 6 -5 and 6 -6. As the tables show, to assess a firm's current operating health, short -term financial, market, technological, and production position are used, while current strategic health is based on strategic market position, technological position, production capabilities, and financial health.

� There are several generally accepted methods for measuring organizational performance. One way for categorizing these methods divides into the distinct types: qualitative and quantitative. However, a few methods do not fall neatly into one or other of these categories but rather are a combination of both types.