Business Policy & Strategic Management Unit-III : Environmental Scanning -Strategic Analysis of Internal and External Variables

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Business Policy & Strategic Management

Unit-III : Environmental Scanning - Strategic Analysis of Internal and External Variables

Notes

Structure

3.1 External environment 3.2 Macro Environment Analysis 3.2.1 The PESTLE Factors 3.3 Micro Environment Analysis

3.3.1 Elements of Micro Environment

3.4 Industry Analysis, Using 5 Forces Model 3.5 Internal Environment 3.6 Internal Analysis using VRIO Framework: A Resource Based View of the Firm 3.7 Value Chain Analysis 3.8 Profiling Environmental Factors 3.9 Environmental Threat and Opportunity Profile (ETOP) 3.10 Organizational Capability Profile (OCP) 3.11 SWOT Analysis

Objectives •

To provide an insight into different types of environment , an organizations works in

•

To make students understand importance of environmental scanning

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To make students understand PESTLE model, Porters five forces model,VRIO model ,VALUE CHAIN analysis, SWOT models

Introduction

Each business organization operates in its unique environment. Environment influence businesses and also get influenced by it. No business can function without interacting and influencing forces that are outside its periphery A successful business has to not only recognize different elements of the environment but also respect, adapt, or manage and influence them. The business must continuously monitor and adapt to the environment if it is to survive and prosper. Successful business identify, appraise and respond to the various opportunities and threats in and around its playfield environment. Environmental scanning can also be referred to environmental monitoring which includes process of accumulation of information, analyzing it and forecasting the impact of all predictable environmental changes. It is all about synchronization between marketing strategies and business environment. “Environmental scanning can be defined as ‘the study and interpretation of the political, economic, social and technological events and trends which influence a business, an industry or even a total market” The environment can affect your start-up in dramatic ways. You can have the best business idea with a great technology but it might still fail miserably if factors like changes in the policies of the host government, new regulations or an economic Amity Directorate of Distance & Online Education

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Notes

crisis in the host country come along. Therefore, it is imperative that you keep a close watch over environmental factors that affect your start-up and prepare adequately to face the emerging challenges. Environmental scanning involves External and Internal environmental Analysis. It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change

Charles Darwin

Environmental scanning is the acquisition and use of information about events, trends, and relationships in an organization’s external environment. It is used to assist management in planning the organization’s future course of action. Organizations scan the environment in order to understand the external forces of change so that they may develop effective responses which secure or improve their position in the future, in order to avoid surprises, identify threats and opportunities, gain competitive advantage, and improve long-term and short-term planning.

Exhibit 3.1 – Types of environments and its constituents

3.1 External Environment

The external environment constitutes everything outside a firm that might affect the ability of the organization to attain its goals. The external environment itself can be subdivided into two main components. There is the Micro Environment (also referred as industry or task environment) confronting the organization, which typically includes actual and potential competitors, suppliers, and buyers (customers or distributors); firms that provide substitute products to those sold in the industry; and firms that provide complements. Then there is the more encompassing Macro Environment (also referred as General environment/ Societal Environment) within which the task environment is embedded. The Macro environment includes Political and Legal forces, Macroeconomic forces, Socio-Cultural forces, Technological forces, Ecological and at times International forces. The Macro or General environment impacts the firm through its influence on the Micro (also referred as Task /Industry environment) When managers analyze the External environment they typically look for Opportunities and Threats. Opportunities arise from circumstances or developments in the external environment that, if exploited through strategies, enable managers to better attain the goals of their Organization. Threats arise from circumstances or Amity Directorate of Distance & Online Education

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developments in the external environment that may adversely affect the ability of managers to attain the goals of their enterprise.

Notes

Exhibit 3.2 – Societal Environment and its constituents

3.2 Macro Environment Analysis

It is traditionally the first step of a Strategic Analysis; it is sometimes referred to as an external analysis, a PEST analysis or a PESTLE analysis. The purpose of the Macro Environment Analysis is to identify possible opportunities and threats to your industry as a whole that are outside the control of your industry. The PESTLE Analysis is a framework used to scan the organization’s external macro environment. The letters stand for Political, Economic Socio-cultural, Technological, Legal and Environmental. Some approaches will add in extra factors, such as International, or remove some to reduce it to PEST. However, these are all merely variations on a theme. The important principle is identifying the key factors from the wider, Uncontrollable External Environment that might affect the organization. 3.2.1 The PESTLE Factors • Political factor- First of all, political factors refer to the stability of the political environment and the attitudes of political parties or movements. This may manifest in government influence on tax policies, or government involvement in trading agreements. Political factors are inevitably entwined with Legal factors such as national employment laws, international trade regulations and restrictions, monopolies and mergers’ rules, and consumer protection. The difference between Political and Legal factors is that Political refers to attitudes and approaches, whereas Legal factors are those which have become law and regulations. Legal needs to be complied with whereas Political may represent influences, restrictions or opportunities, but they are not mandatory. •

Economic factor- represent the wider economy so may include economic growth rates, levels of employment and unemployment, costs of raw materials such as

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energy, petrol and steel, interest rates and monetary policies, exchange rates and inflation rates. These may also vary from one country to another.

Notes •

Socio-cultural factor- represents the culture of the society that an organization operates within. They may include demographics, age distribution, population growth rates, level of education, distribution of wealth and social classes, living conditions and lifestyle.

•

Technological factor refer to the rate of new inventions and development, changes in information and mobile technology, changes in internet and e-commerce or even mobile commerce, and government spending on research. There is often a tendency to focus Technological developments on digital and internet-related areas, but it should also include materials development and new methods of manufacture, distribution and logistics.

•

Ecological factor impacts can include issues such as limited natural resources, waste disposal and recycling procedures.

3.3 Micro Environment Analysis

Micro-environment is the specific or the task environment of a business which affects its working or operations directly on a regular basis. While the changes in the macro-environment affect business in the long run, the effects of changes in the microenvironment are noticed immediately. Micro environment factors are factors close to a business that have a direct impact on its business operations and success. Before deciding corporate strategy businesses should carry out a full analysis of their micro environment. At this point we discuss common micro environment factors. This is also known as the task environment and affects business and marketing at the daily operating level. While the changes in the macro environment affect business in the long run, the effect of micro environmental changes is noticed almost immediately. Organizations have to closely analyse and monitor all the elements of microenvironment in order to adapt to rapid change and stay competitive. When carrying out a Macro environment analyses you will be seeking to answer the questions “What will affect the growth of our Industry as a whole?” and “What is the likely impact of all of the things that affect the growth of your industry?” Hence, organizations must closely analyze and monitor all the elements of the micro-environment on a regular basis. The elements of microenvironment are as follows: 3.3.1 Elements of Micro-environment 1. Consumers/Customers: No organization can survive without customers and consumers. A customer is the one who buys a product or service for the consumer who ultimately consumes or uses the product or service of the organization.Hence, the consumer occupies the central position; therefore an organization must closely monitor and analyze the following: a)

Who are the customers/consumers?

b)

What features or benefits are they looking for?


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c)

What are their income levels?

d)

What are their tastes, preferences?

e)

What are their buying patterns, etc?

Notes

2. Organization: An organization refers to a group of all individuals working in different capacities and the practices and culture they follow. In micro-environment analysis, nothing is as important as self-analysis, which is done by the organization itself. Understanding one’s own strengths and weaknesses in a particular business is of vital importance. Organizations consist of specific groups of people who are likely to influence an organization, which are as follows: a) Owners-Proprietor, partners, shareholders, etc., who invest resources and also make major decisions for the business. b) Board of directors-Elected by share holders, the board is responsible for day-today and general management of the organization to ensure that it is being run in a way that best serves the shareholders’ interests. c) Employees-People who actually do the work in an organization. Employees are the major force within an organization. It is important for an organization to have its employees embrace the same values and goals as the organization. However, they differ in beliefs, education, attitudes, and capabilities. When the management and employees work towards different goals, everyone suffers. 3. Market: Market refers to the system of contact between an organization and its customers. The firm should study the trends and development and the key success factors of the market, which are as follows: a)

The existing and the potential demand in market

b)

Market growth rate

c)

Cost structure

d)

Price sensitivity

e)

Technological structure

f)

Distribution system, etc

4. Suppliers: The suppliers refer to the providers of inputs, like raw materials, equipment and services, to an organization. Large companies have to deal with hundreds of suppliers to maintain their production. Suppliers with their own bargaining power affect working and cost structure of the industry. Hence it is important for an organization to carry out a study of the following: a) Who are the suppliers? b) What are their products, prices and terms and conditions?


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Notes

c) Whether to “Outsource” production or get it done “in-house” depending on this supplier environment, and so on. 5. Intermediaries: Intermediaries include agents and brokers who facilitate the contact between buyers and sellers for a commission. They may exert a considerable influence on the business organizations as, in many cases, the consumers are not aware of the manufacturers and their products. Hence, manufacturers use intermediaries to reach out to consumers.

3.4 Industry Analysis: Using 5 Forces Model

According to Michael E. Porter these are the same thing. He developed Porters Five forces analysis which is a framework for industry analysis and Business Strategy Development. He referred to these five forces as Micro environment. The five forces being; 1)

The threat of the entry of new competitors

2)

The threat of substitute products or services

3)

The bargaining power of customers (buyers)

4)

The bargaining power of suppliers

5)

The intensity of competitive rivalry

Exhibit 3.3 – Porters 5 forces model Porter’s Five Competitive Forces model is used by businesses when thinking about business strategy and the impact of Information technology. This model can help a business decide whether to, enter an industry or expand your business in the industry you are already working on. The more powerful these forces in an industry, the lower its profit potential. The strength of each force differs by industry and changes over time. Porter’s Five Competitive Forces model is used for industry analysis in several ways, to guide your strategic decisions. Benefit from industry analysis by: Amity Directorate of Distance & Online Education

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•

Understanding the competitive forces in your industry.

•

Assessing the attractiveness of, and growth opportunities within, a new industry.

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Developing effective strategies to raise your profitability, power, and competitive position in an industry.

Notes

Industry Rivalry/Competitors Rivalries naturally develop between companies competing in the same market. Competitors use means such as advertising, introducing new products, more attractive customer service and warranties, and price competition to enhance their standing and market share in a specific industry. To Porter, the intensity of this rivalry is the result of factors like equally balanced companies, slow growth within an industry, high fixed costs, lack of product differentiation, overcapacity and price-cutting, diverse competitors, high-stakes investment, and the high risk of industry exit. There are also market entry barriers. Threat from Substitute Products Substitute products are the natural result of industry competition, but they place a limit on profitability within the industry. A substitute product involves the search for a product that can do the same function as the product the industry already produces. Porter uses the example of security brokers, who increasingly face substitutes in the form of real estate, money-market funds, and insurance. Substitute products take on added importance as their availability increases. Bargaining Power of Suppliers Suppliers have a great deal of influence over an industry as they affect price increases and product quality. A supplier group exerts even more power over an industry if it is dominated by a few companies, there are no substitute products, the industry is not an important consumer for the suppliers, their product is essential to the industry, the supplier differs costs, and forward integration potential of the supplier group exists. Labor supply can also influence the position of the suppliers. These factors are generally out of the control of the industry or company but strategy can alter the power of suppliers. Bargaining Power of Buyers The buyer’s power is significant in that buyers can force prices down, demand higher quality products or services, and, in essence, play competitors against one another, all resulting in potential loss of industry profits. Buyers exercise more power when they are large-volume buyers, the product is a significant aspect of the buyer’s costs or purchases, the products are standard within an industry, there are few changing or switching costs, the buyers earn low profits, potential for backward integration of the buyer group exists, the product is not essential to the buyer’s product, and the buyer has full disclosure about supply, demand, prices, and costs. The bargaining position of buyers changes with time and a companies (and industry’s) competitive strategy. Threat from Potential Entrants Threats of new entrants into an industry depend largely on Barriers to Entry. Porter identifies six major barriers to entry: •

Economies of scale, or decline in unit costs of the product, which force the entrant to enter on a large scale and risk a strong reaction from firms already in the industry, or accepting a disadvantage of costs if entering on a small scale.

•

Product differentiation, or brand identification and customer loyalty.


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Notes

•

Capital requirements for entry; the investment of large capital, after all, presents a significant risk.

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Switching costs or the cost the buyer has to absorb to switch from one supplier to another.

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Access to distribution channels. New entrants have to establish their distribution in a market with established distribution channels to secure a space for their product.

•

Cost disadvantages independent of scale, whereby established companies already have product technology, access to raw materials, favorable sites, advantages in the form of government subsidies, and experience.

New entrants can also expect a barrier in the form of government policy through federal and state regulations and licensing. New firms can expect retaliation from existing companies and also face changing barriers related to technology, strategic planning within the industry, and manpower and expertise problems. The entry deterring price or the existence of a prevailing price structure presents an additional challenge to a firm entering an established industry. In summary, Porter’s five-forces model concentrates on five structural industry features that comprise the competitive environment, and hence profitability, of an industry. Applying the model means, to be profitable, the firm has to find and establish itself in an industry so that the company can react to the forces of competition in a favorable manner.

3.5 Internal Environment

An organization’s internal environment comprises its structures and processes, which are influenced by the dominant culture of the organization. Internal and external environments are inextricably linked, because the effectiveness of an organization’s structures and processes can help or hinder the task of responding to environmental change. Where employees share the vision of management, they may be more likely to embrace external change, rather than fear it and become reactive rather than proactive. Strong leadership can provide a focused effort at marshalling the resources of an organization to meet the challenges and opportunities posed by the external environment. Employees usually make up a critical element of the internal environment. There are several methods by which organizations seek to gain the moral involvement of employees to share the challenges and opportunities of external change. The internal environment constitutes everything inside the firm that might affect the ability of managers to pursue certain actions or strategies. The internal environment includes •

The organization of the firm (its structure, culture, controls, and incentives),

•

The employees of the firm(its human capital), and

•

The resources of the firm (its tangible and intangible assets).

Each of these elements can be strength or a weakness. A Strength is an activity the organization is good at; it is a potential source of competitive advantage. A Weakness is an activity that the organization does not excel at; it may be a source of competitive disadvantage. When managers analyze the internal environment of their own firm, they often do so by identifying its strengths and weaknesses. This inward focus complements the identification of opportunities and threats in the external environment. Taken together, an inventory of internal strengths and weaknesses and external opportunities and threats can help managers develop strategy. This methodology, Amity Directorate of Distance & Online Education

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which is often referred to by the acronym of SWOT analysis (strengths, weaknesses, opportunities, and threats), is a standard part of strategic planning and decision making; we will discuss it in more detail later.

Notes

3.6 Internal Analysis using VRIO Framework: A Resource Based View of the Firm “VRIO” stand for: •

Value (the question of value)

•

Rarity (the question of rarity)

•

Imitability (the question of imitability)

•

Organization (the question of organization)

The company/firm need to ask themselves about the resources or capability to determine its competitive potential. VRIO is a mechanism that integrates two existing theoretical frameworks: the positioning perspective and the resource-based view. It is the primary tool for accomplishing internal analysis. The VRIO framework, in a wider scope, is part of a much larger strategic scheme of a firm. The basic strategic process that any firm goes through begins with a vision statement, and continues on through objectives, internal & external analysis, strategic choices (both business-level and corporate-level), and strategic implementation. The firm will hope that this process results in a competitive advantage in the marketplace they operate in. VRIO falls into the internal analysis step of these procedures, but is used as a framework in evaluating just about all resources and capabilities of a firm, regardless of what phase of the strategic model it falls under. VRIO is an acronym for the four question framework you ask about a resource or capability to determine its competitive potential: the question of Value, the question of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of Organization (ability to exploit the resource or capability). • • • •

The Question of Value: “Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?” The Question of Rarity: “Is control of the resource/capability in the hands of a relative few?” The Question of Imitability: “Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/ capability?” The Question of Organization: “Is the firm organized, ready, and able to exploit the resource/capability?”

Valuable?

Rare? Costly to imitate?

Exploited by the Competitive implication organization?

No

Competitive disadvantage

Yes

No

Competitive parity

Yes

Yes

No

Yes

Yes

Yes

No

Unexploited competitive advantage

Yes

Yes

Yes

Yes

Sustained competitive advantage

Temporary competitive advantage


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Notes

The resource-based view (RBV) as a basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable interchangeable and intangible tangible resources at the firm’s disposal. To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile. Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable without great effort). If these conditions hold, the bundle of resources can sustain the firm’s above average returns. The VRIO model also constitutes a part of Resource Based View of the Firm

3.7 Value Chain Analysis

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business Value Chain Analysis is a strategy tool used to analyze internal firm activities. Its goal is to recognize, which activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm and which ones could be improved to provide competitive advantage. In other words, by looking into internal activities, the analysis reveals where a firm’s competitive advantages or disadvantages are. Value chain analysis is a powerful tool for managers to identify the key activities within the firm which form the value chain for that organization, and have the potential of a sustainable competitive advantage for a company. Therein, competitive advantage of an organization lies in its ability to perform crucial activities along the value chain better than its competitors. The Value Chain framework developed by Michael E Porter is “An Interdependent system or network of activities, connected by linkages”. When the system is managed carefully, the linkages can be a vital source of competitive advantage. The value chain analysis essentially entails the linkage of two areas. Firstly, the value chain links the value of the organizations’ activities with its main functional parts. Then the assessment of the contribution of each part in the overall added value of the business is made. In order to conduct the value chain analysis, the company is split into primary and support activities. Primary activities are those that are related with production, while support activities are those that provide the background necessary for the effectiveness and efficiency of the firm, such as human resource management. The primary and secondary activities of the firm are discussed in detail below.


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Exhibit 3.4 – Value Chain Analysis Primary activities The primary activities (Porter, 1985) of the company include the following: •

Inbound logistics: These are the activities concerned with receiving the materials from suppliers, storing these externally sourced materials, and handling them within the firm.

•

Operations: These are the activities related to the production of products and services. This area can be split into more departments in certain companies. For example, the operations in case of a hotel would include reception, room service etc.

•

Outbound Logistics: These are all the activities concerned with distributing the final product and/or service to the customers. For example, in case of a hotel this activity would entail the ways of bringing customers to the hotel.

•

Marketing and Sales: This functional area essentially analyses the needs and wants of customers and is responsible for creating awareness among the target audience of the company about the firm’s products and services. Companies make use of marketing communications tools like advertising, sales promotions etc. to attract customers to their products.

•

Customer Service: There is often a need to provide services like preinstallation or after-sales service before or after the sale of the product or service.

Notes

Support activities The support activities of a company include the following: •

Procurement: This function is responsible for purchasing the materials that are necessary for the company’s operations. An efficient procurement department should be able to obtain the highest quality goods at the lowest prices.

•

Management: This is a function concerned with recruiting, training, motivating and rewarding the workforce of the company. Human resources are increasingly becoming an important way of attaining sustainable competitive advantage.

•

Technology Development: This is an area that is concerned with technological innovation, training and knowledge that is crucial for most companies today in order to survive.

•

Firm Infrastructure: This includes planning and control systems, such as finance, accounting, and corporate strategy etc.


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Notes

3.8 Profiling Environmental Factors

Exhibit 3.5 – What constitutes Strategy There are many strategy considering parameters which can be classified under two broad categories viz., internal factors and external factors to the organization. In order to access the importance and effect of change in such factor on the operation and strategy of the business various model, such as Strategic Advantage Profile (SAP), Environmental Threat and Opportunity Profile(ETOP), Organizational Capability Profile(OCP) are developed by experts.

3.9 Environmental Threat and Opportunity Profile (ETOP):

ETOP is summarized depiction of the environmental actors and their impact on the organization. The preparation of ETOP involves dividing the environment into different sectors and then analyzing the impact of each factor of the organization. A derailed ETOP subdivides each environment sector into sub factor and then the impact of each sub factor on the organization and is described in a form of statement. A summary of ETOP shows only the major factors. ETOP is the most useful way of structuring the result of environmental analysis. Environmental Factors

Degree of Importance High (3)

Medium (2)

Low (1)

Degree of Impact High ±3

Medium ±2

Low ±1

Economic Political – Legal Technological Socio-cultural Competitive

3.10 Organizational Capability Profile (OCP)

OCP is summarized statement which provides overview of strength and weakness in key result areas likely to affect future operation of the organization. Information in this profile may be presented in qualitative terms or quantitative terms. After the preparation of OCP, the organization is in a position to assess its relative strength and weaknesses vis-a-vis its competitors. If there is any gap in area, suitable action may be taken to overcome that.OCP shows the company’s capacity. OCP tells about company’s potential and capability. OCP tells what company can do.


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Capability Factors

Degree of strength and weakness

1. Financial capability factors a. Source of fund and cost b. Usage of funds c. Management of funds

Notes

2. Marketing capability factor a. Product related b. Price related c. Promotion related d. Distribution related 3. Operation capability factor a. Plant location b. Production system c. Operation and control system d. R & D system 4. Personal capability factor a. Personnel system b. Organizational and employee characteristics c. Industrial relations d. Quality and motivation of personnel 5. General management capability factor a. General management system b. External relations c. Organizational climate

Strategic Advantage Profile (SAP):

SAP describes the organization’s competitive position in the market place. A comparison of SAP and OCP shows that, OCP indicates what the organization do base on its capability; SAP indicates what the organization has done or is doing in comparison to its competitors to generate competitive advantage for itself. Thus, OCP is internal-oriented, while SAP is external-oriented. In preparing SAP 3 factors are important: 1. The organization should identify the factors which are relevant for determining success in the industry concerned. These factors are known as KSF. 2. Organization should measure its performance on these factors in comparison to its competitors. Based on comparison, the organization can find out whether it has advantage or disadvantage in terms of various factors. 3. After identifying advantage, the next step is to measure their sustainability because any advantage may turn into disadvantage due to change in environmental factors. Factors

Advantage/Disadvantage High ±3

Medium ±2

Low ±1

Sustainability High Medium (3) (2)

Low (1)

1. Product related a. Appearance b. Style c. Functionality d. Range e. Cost structure Amity Directorate of Distance & Online Education

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Notes

2. Market related a. Pricing b. Distribution channel c. Customer service d. Customer relationship e. Customer satisfaction f. Brand loyalty g. Market share

3.11 SWOT Analysis

SWOT is an acronym used to describe the particular Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company. A SWOT analysis should not only result in the identification of a corporation’s core competencies, but also in the identification of opportunities that the firm is not currently able to take advantage of due to a lack of appropriate resources. The SWOT Analysis framework has gained widespread acceptance because it is both simple and powerful for strategy development. However, like any planning tool, SWOT is only as good as the information it contains. Thorough market research and accurate information systems are essential for the SWOT analysis to identify key issues in the environment. Assess your market: • What is happening externally and internally that will affect our company? •

Who are our customers?

•

What are the strengths and weaknesses of each competitor? (Think Competitive Advantage)

•

What are the driving forces behind sales trends?

•

What are important and potentially important markets?

•

What is happening in the world that might affect our company?

•

What does it take to be successful in this market? (List the strengths all companies need to compete successfully in this market.)

Assess your company: • What do we do best? •

What are our company resources – assets, intellectual property, and people?

•

What are our company capabilities (functions)?

Assess your competition: • How are we different from the competition? •

What are the general market conditions of our business?

•

What needs are there for our products and services?


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•

What are the customer-market-technology opportunities?

•

What are the customer’s problems and complains with the current products and services in the industry?

•

What “If only….” statement does a customer make?

Notes

Competitor analysis •

Identify the actual competitors as well as substitutes.

•

Assess competitors’ objectives, strategies, strengths & weaknesses, and reaction patterns.

•

Select which competitors to attack or avoid.

The Internal Analysis of strengths and weaknesses focuses on internal factors that give an organization certain advantages and disadvantages in meeting the needs of its target market. Strengths refer to core competencies that give the firm an advantage in meeting the needs of its target markets. Any analysis of company strengths should be market oriented/customer focused because strengths are only meaningful when they assist the firm in meeting customer needs. Weaknesses refer to any limitations a company faces in developing or implementing a strategy (?). Weaknesses should also be examined from a customer perspective because customers often perceive weaknesses that a company cannot see. Being market focused when analyzing strengths and weaknesses does not mean that non-market oriented strengths and weaknesses should be forgotten. Rather, it suggests that all firms should tie their strengths and weaknesses to customer requirements. Only those strengths that relate to satisfying a customer need should be considered true core competencies. The following area analysis is used to look at all internal factors affecting a company: •

Resources: Profitability, sales, product quality brand associations, existing overall brand, relative cost of this new product, employee capability, product portfolio analysis

•

Capabilities: To identify internal strategic strengths, weaknesses, problems, constraints and uncertainties

The External Analysis examines opportunities and threats that exist in the environment. Both opportunities and threats exist independently of the firm. The way to differentiate between a strength or weakness from an opportunity or threat is to ask: Would this issue exist if the company did not exist? If the answer is yes, it should be considered external to the firm. Opportunities refer to favorable conditions in the environment that could produce rewards for the organization if acted upon properly. That is, opportunities are situations that exist but must be acted on if the firm is to benefit from them. Threats refer to conditions or barriers that may prevent the firms from reaching its objectives. The following area analysis is used to look at all external factors affecting a company: •

Customer analysis: Segments, motivations, unmet needs

•

Competitive analysis: Identify completely, put in strategic groups, evaluate performance, image, their objectives, strategies, culture, cost structure, strengths, weakness


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Notes

•

Market analysis: Overall size, projected growth, profitability, entry barriers, cost structure, distribution system, trends, key success factors

•

Environmental analysis: Technological, Governmental, Economic, Cultural, Demographic, Scenarios, Information-need areas

The SWOT Matrix helps visualize the analysis. Also, when executing this analysis it is important to understand how these elements work together. When an organization matched internal strengths to external opportunities, it creates core competencies in meeting the needs of its customers. In addition, an organization should act to convert internal weaknesses into strengths and external threats into opportunities. Iternal

External

Strengths

Opportunities

Weaknesses

Threats Exhibit 3.6 – SWOT Analysis

SWOT: Focus on your strengths. Shore up your weaknesses. Capitalize on your opportunities. Recognize your threats. Identify •

Against whom do we compete?

•

Who are our most intense competitors? Less intense?

•

Makers of substitute products?

•

Can these competitors be grouped into strategic groups on the basis of assets, competencies, or strategies?

•

Who are potential competitive entrants? What are their barriers to entry?

Evaluate •

What are their objectives and strategies?

•

What is their cost structure? Do they have a cost advantage or disadvantage?

•

What is their image and positioning strategy?

•

Which are the most successful/unsuccessful competitors over time? Why?

•

What are the strengths and weaknesses of each competitor?

•

Evaluate competitors with respect to their assets and competencies.

Resources A good starting point to identify company resources is to look at tangible, intangible and human resources. •

Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identifies and valued in the firm’s financial statements.


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•

Intangible resources are largely invisible, but over time become more important to the firm than tangible assets because they can be a main source for a competitive advantage. Such intangible recourses include reputational assets (brands, image, etc.) and technological assets (proprietary technology and know-how).

Notes

Human resources or human capital are the productive services human beings offer the firm in terms of their skills, knowledge, reasoning, and decision-making abilities. Capabilities

Resources are not productive on their own. The most productive tasks require that resources collaborate closely together within teams. The term organizational capabilities are used to refer to a firm’s capacity for undertaking a particular productive activity. Our interest is not in capabilities per se, but in capabilities relative to other firms. To identify the firm’s capabilities we will use the functional classification approach. A functional classification identifies organizational capabilities in relation to each of the principal functional areas.


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Notes

Summary

•

Two types of Business environment exists a. External or Macro level Environment b. Internal or Micro level Environment

•

Porters Five forces Model a. Potential Entrants b. Buyer’s c. Substitutes d. Suppliers e. Competition

Porter’s Five Competitive Forces model is used by businesses when thinking about business strategy and the impact of Information technology. This model can help a business decide whether to, enter an industry or expand your business in the industry you are already working on •

Internal Environment Using VRIO Model VRIO : Value-Rarity-Imitability-Organization

VRIO is an acronym for the four question framework you ask about a resource or capability to determine its competitive potential: the question of Value, the question of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of Organization (ability to exploit the resource or capability). •

Value Chain Analysis:


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Value Chain Analysis is a strategy tool used to analyze internal firm activities. Its goal is to recognize, which activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm and which ones could be improved to provide competitive advantage. In other words, by looking into internal activities, the analysis reveals where a firm’s competitive advantages or disadvantages are •

Notes

ETOP , OCP, SAP , SWOT Analysis

ETOP is summarized depiction of the environmental actors and their impact on the organization. SAP describes the organization’s competitive position in the market place. A comparison of SAP and OCP shows that, OCP indicates what the organizations do base on its capability. SWOT is an acronym used to describe the particular Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company. A SWOT analysis should not only result in the identification of a corporation’s core competencies, but also in the identification of opportunities. Check your progress: 1. All are elements of micro environment except-a) Consumer b) Suppliers c) Society d) Competitors 2. Select the correct statement-a) Environmental factors are totally beyond the control of a single industrial enterprise. b) Environmental factors are largely beyond the control of a single industrial enterprise. c) Environmental factors are totally within the control of a single industrial enterprise. d) None 3. All are elements of macro environment except-a) Society b) Technology c) Competitors d) Competitors 4. Strategy formulation is primarily an _____________ process and strategy implementation is primarily an _____________ process. a) Intellectual, Operational b) Operational, Intellectual Amity Directorate of Distance & Online Education

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c) Intelligent, Interim d) Interim, Intellectual 5. An inherit limitation or constraint which creates disadvantages-a) Threat b) Weakness c) Loophole d) Deviation 6. Goal of SWOT analysis is to ____________ the organization’s oppurtunities and strengths while ___________ its threats and _____________ its weakness. a) Avoid;Neutralize,Correct b) Exploit,Neutralize,Correct c) Avoid,Capitalize,Neutralize d) Exploit,Avoid,Ignore 7. Expand KSF-a) Key Strategic Factors b) Key Success Factors c)

Key Sources Facilitators

d) Key Secondary Facilitators 8. Strike out the correct combinations i.

The environment is constantly changing

ii. Various environmental constituents exist in isolation and do not interact with each other iii. The environment has a far reaching impact on organizations a) i and ii b)

ii and iii

c)

i and iii

d)

All

Questions & Exercises 1. What is Demographic environment of business? 2. Write a short note on macro and micro environment 3. Discuss Porter 5 forces model with suitable examples. 4. Explain the concept of backward linkages 5. Explain Value Chain Analysis Amity Directorate of Distance & Online Education

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For Further Readings 1. Exploring Corporate Strategy: Gerry Jhonson, Kevan Scholes

Notes

2. Pearce John A & Robinson R B, 1977, Strategic Management : Strategy Formulation and Implementation, 3rd Ed., A.I.T.B.S. Publishers & Distributors. 3. Aaker David Strategic Market Management, 5th Ed., John Wiley and sons 4. Regular reading of all latest Business Journals : HBR, Strategist, Busienss World, Business India, Business Today. 5. Porter Michael, Competitive Advantage: Creating and sustaining superior performance, Free press. 6. Thomson & Strickla d, Business policy and Strategic management, 12th Ed., PHI. 7. Munjal, A. Cases and readings in Strategic Management, ABS Handbook A case study on Rolls Royce: Porters Five Forces Model One way in which staff within Rolls- Royce have focused their actions for responding to the changing role of the business, has been to use Porter’s ‘Five Forces’ model of industry competition. Five Forces analysis gives an improved understanding of the degree of competition within the business environment. It has helped them to develop a better understanding of the business environment so that business opportunities could be analyzed. The model identifies one force within the industry – competitive rivalry - as well as four forces outside the industry: 8.

Potential entrants and the threat of entrants

9.

Power of Buyers

10. Power of Suppliers 11. Threats of Substitutes Competitive Rivalry As described above three dominant players operate in this oligopolistic global industry. The industry is capital intensive and there is a requirement for high investment in advanced technology and research and development. No single manufacturer dominates the industry, so balance fuels the rivalry. Competition in the primary market for aero-engines is intensified by the link to the secondary market for engine part sales and services. Access to the secondary market is dependent on achieving the original sale of new engines. In recent years the intensity of competition has increased as each manufacturer has tried to improve its volumes and market share. Rivalry has also intensified because gas turbine engines are now essentially a mature product and the potential for technological differential advantage has been reduced. Power of Buyers The numbers of potential buyers of new aircraft are low. Buyers of aircraft engines are therefore essentially price makers, with the market price for new engines being largely set by the buyer. The power of buyers has further increased in recent years as many airlines have become ‘global carriers’. The decision to purchase a particular aircraft or engine combination is a long-term one. This means that failure to secure an order may prevent an engine manufacturer trading with a particular airline for more than a decade. The selection of one engine type can lead to a domino effect, with other competing buyers following the same selection. Airlines are increasingly seeking lifetime cost of ownership guarantees, and reduced repair costs. Power of Supplier The suppliers to the aero-engine manufacturer have limited power. There are many hundreds of different suppliers to the aero-engine industry. They supply all nature of components, from nuts and bolts to state-of-the-art electronic control systems costing Amity Directorate of Distance & Online Education

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hundreds of thousands of pounds. The power of many of the smaller companies, which represent most of the supplier base, has been reduced. This is due to engine manufacturers adopting dual sourcing strategies, using a range of alternative sources of supply. The most powerful suppliers are those involved in the supply of high specification electronic control equipment. Threats of Entry Although not unknown, entry to the aero-engine industry is extremely difficult. The highly specialized advanced nature of aero-engine design combined with the costs of research and development as well as the confidence of customers represent significant barriers to entry. New engines also need extensive testing before gaining airworthiness approval from the authorities. The market is also sensitive to the reputation of the engine manufacturer, where names such as Rolls-Royce represent a range of proven high-technology products. Threats of Substitutes There is no substitute for an aero engine and the threat of substitutes for air transport itself is minor. However, it is thought that the development of video conferencing capability will reduce some business travel and the growth of high speed train travel (e.g. Eurostar) will affect some travel decisions. However, both of these developments are taking place at a time when the demand for air travel is increasing. This analysis shows that the commercial aero-engine business is highly competitive, with the buyer possessing and exerting a very powerful influence upon organizations. The high barriers to entry and the low threat of substitutes indicate that existing competitors will continue to share the business between them. However, a slowdown in industry growth and the increasing maturity of products will intensify the degree of rivalry between the engine manufacturers.

Conclusion

In response to changes within its business environment, Rolls-Royce has developed its orientation from that of engineering to become more business- and service-focused. The organization has had to become much more proactive, dealing with new ideas to create more services and customer focus. In the past, change was rare and slow, the company tended to follow the market trend. The structure of the organization has been realigned to meet the needs of the new way of operating. Organizational structures define important relationships within the business and create a mechanism for meeting business objectives. At the same time, it has been important to create a new business culture within Rolls-Royce. A culture exists within the minds and hearts of the people of an organization and contributes to the way they make decisions and develop business strategies. As an organization changes from a product-focused organization towards becoming a service-orientated culture, this requires more involvement of its people, with greater empowerment and rapid decision-taking. The corporate identity is the sum of the culture and its expression in behaviour and physical terms. Rolls-Royce has defined the identity that it needs to encourage, building on its past reputation and achievements for continuing success. As these changes take place, the organization is also realigning its financial reporting framework and corporate governance. This will change how the whole business shapes its purposes and priorities.


Business Policy & Strategic Management Unit-III : Environmental Scanning -Strategic Analysis of Internal and External Variables

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