CHAPTER 1



1.0: Environmental Scanning

Environmental scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to keep people within the cooperation. It is a tool that a corporation uses to avoid strategic surprise and to ensure long-term health.

2.0: Scanning of external environmental variables

The social environment includes general forces that do not directly touch on the short-run activities of the organization but those can, and often do, influence its long-run decisions. These are:

• Economic forces

• Technological forces

• Political-legal forces

• Socioculture forces

3.0: Scanning of Social Environment

The social environment contains many possible strategic factors. The number of factors becomes enormous when one realize that each country in the world can be represented by its own unique set of societal forces, some in which are very similar to neighbouring countries and some of which are very different.

3.1: Monitoring of social trends

• Large corporations categorized the social environment in any one geographic region into four areas and focus their scanning in each area on trends with corporate-wide relevance. Trends in any area many be very important to the firms in other industries.

• Trends in economic part of societal environment can have an obvious impact on business activity. Changes in the technological part of the societal environment have a significant impact on business firms. Demographic trends are part of socioculture aspects of the societal environment.

3.2: International society organization

• For each countries or group of countries in which a company operates, management must face a whole new societal environment having different economic, technological, political-legal, and sociocultural variables. This is especially an issue for a multinational corporation, a company having significant manufacturing and marketing operation in multiple countries. International society environments vary so widely that a corporation’s internal environment and strategic management process must be very flexible. Differences in social environments strongly affect the ways in which a multinational company operates.

4.0: Scanning of the Task Environment

• A corporation’s scanning of the environment should include analysis of all the relevant elements in the task environment. These analyses take the form of individual reports written by various people in different parts of the firms. These and other reports are then summarized and transmitted up the corporate hierarchy for the top management and transmitted up the corporate hierarchy for top management to use in strategic decision making. If a new development reported regarding a particular product category, top management may then sent memos to people throughout the organization to watch for and reports on development in related product areas.

• The many reports resulting from these scanning efforts when boiled down to their essential, act to use in strategic decision making. If a new development reported regarding a particular product category, top management may then sent memos to people throughout the organization to watch for and reports on development in related product areas. The many reports resulting from these scanning efforts when boiled down to their essential, act as a detailed list of external list of external strategic factors.

4.1: Identification of external strategic factors

One way to identify and analyze developments in the external environment is to use the issues priority matrix as follows.

• Identify a number of likely trends emerging in the societal and task environment. These are strategic environmental issues. Those important trends that, if they happen, will determine what various industries will look like.

• Assess the probability of these trends actually occurring.

• Attempt to ascertain the likely impact of each of these trends of these corporations.

5.0: Industrial Analysis: Analyzing the task environment

5.1: Michael Porter’s approach to industry analysis (Porter’s 5 Forces)

Michael porter, an authority on competitive strategy, contends that a corporation is most concerned with the intensity of competition within its industry. Basic competitive forces determine the intensity level. The stronger each of these forces is, the more companies are limited in their ability to raise prices and earned greater profits.

5.1(a): Threat of new entrants

New entrants are newcomers to an existing industry. They typically bring new capacity, a desire to gain market share and substantial resources. Therefore they are threats to an established corporation. Some of the possible barriers to entry are the following:

• Economics of scale

• Product differentiation

• Capital requirements

• Switching costs

• Access to distribution channels

• Cost disadvantages independent of size

• Government policy

5.1(b): Rivalry among existing firms

Rivalry is the amount of direct competition in an industry. In most industries corporations are mutually dependent. A competitive move by one firm can be expected to have a noticeable effect on its competitors and thus make us retaliation or counter efforts. According to Porter, intense rivalry is related to the presence of the following factors:

• Number of competitors

• Rate of industry growth

• Product or service characteristics

• Amount of fixed costs

• Capacity

• Height of exit barriers

• Diversity of rivals

5.1(c): Threat of substitute product or services

Substitute products are those products that appear to be different but can satisfy the same need as another product. According to Porter, ‘substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge’. To the extent that switching costs are low, substitutes may have a strong effect on the industry.

5.1(d): Bargaining power of buyers

Buyers affect the industry through their ability to force down prices, bargain for higher quality or more services, and play competitors against each other.

5.1(e): Bargaining power of suppliers

Suppliers can affect the industry through their ability to raise prices or reduce the quality of purchased goods and services.

6.0: Boston Consulting Group Matrix (BCG Matrix)

It was developed in the early 70s by the Boston Consulting Group. The BCG Matrix can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value corporation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generates a lot of cash.

The BCG has 2 dimensions: Market Share and Market Growth. The basic idea behind it is: if a product has a bigger market share, or if the product’s market grows faster, it is better for the company.

The four categories are:

1. DOGS (Low growth, Low market share)

• Dogs have low market share and a low growth rate and thus neither generate now consume a large amount of cash.

• Dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture.

2. QUESTION MARKS (High growth, Low market share)

• Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares, they do not generate much cash. The result is large net cash consumption.

• A question mark also known as a ‘problem child’, has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows.

• If a question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the determine whether they are worth the investment required to grow market share.

3. STARS (High growth, High market share)

• Stars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate; therefore the cash in each direction approximately nets out.

• If a star can maintain its large market share, it will become a cash cow when the market growth rate declines. The portfolio of a diversified company always should have stars that will become the next cash cows and ensure future cash generation.

4. CASH COWS (Low growth, High market share)

• As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generate more cash that they consume. Such business unite should be ‘milked’, extracting the profits and investing as little cash as possible.

• Cash cows provide the cash required to turn question marks into market leader, to cover the administrative costs of the company, to fund R&D, to service the corporate debt and to pay dividends to shareholders.

Under the growth-share matrix model, as an industry matures and its growth rate decline, a business unit will become either a cash cow or a dog, determined solely by whether it had become the market leader during the period of high growth.

6.1: Other uses and benefits of the BCG Matrix

• If a company is able to use the experience curve to its advantage, it should be able to manufacture and sell new products at a price that is low enough to get early market share leadership. Once it becomes a start, it is destined to be profitable.

• BCG model is helpful for managers to evaluate balance in the firm’s current portfolio of Stars, Cash Cows, Question Marks and Dogs.

• BCG method is applicable to large companies that seek volume and experience effects.

• The model is simple and easy to understand.

• It provides a base for management to decide and prepare for future actions.

6.2: Limitations of the BCG Matrix

Some limitations of the BCG Matrix include:

• It neglects the effects of synergy between business units.

• High market share is not the only success factor.

• Market growth is not the only indicator for attractiveness of a market.

• Sometimes Dogs can earn even more cash as Cash Cows.

• The problems of getting data in the market share and market growth.

• There is no clear definition of what constitutes a ‘market’.

• A high market share does not necessarily lead to profitability all the time.

• The model uses only two dimensions – market share and growth rate. This may tempt management to emphasize a particular product, or to divest prematurely.

• A business with a low market share can be profitable too.

• The model neglects small competitors that growing market shares.

7.0: SWOT Analysis

A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis.

The SWOT analysis provides information that is helpful in matching the firm’s resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan:

7.0(a): Strengths

A firm’s strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include:

• Patents

• Strong brand names

• Good reputation among customers.

• Cost advantages from proprietary know-how.

• Exclusive access to high grade natural resources.

• Favourable access to distribution networks.

7.0(b): Weakness

The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses:

• Lack of patent protection.

• A weak brand name.

• Poor reputation among customers.

• High cost structure.

• Lack of access to the best natural resources.

• Lack of access to key distribution channels.

In some cases, a weakness may be flip side of strengths. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment.

7.0(c): Opportunities

The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include:

• An unfulfilled customer need.

• Arrival of new technologies.

• Loosening of regulations.

• Removal of international barriers.

7.0(d): Threats

Changes in the external environmental also may present threats to the firm. Some examples of such threats include:

• Shifts in consumer tastes away from the firm’s products.

• Emergence of substitute products.

• New regulations.

• Increased trade barriers.

7.1: SWOT Matrix

A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm’s strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity.

To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below:

• S-O Strategies: pursue opportunities that are a good fit to the company’s strengths.

• W-O Strategies: overcome weakness to pursue opportunities.

• S-T Strategies: identify ways that the firm can use its strengths to reduce its vulnerability to external threats.

• W-T Strategies: establish a defensive plan to prevent the firm’s weakness from making it highly susceptible to external threats.

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