Environment scanning is that exercise that involves continuous process of monitoring the dynamic- interplay of all those forces namely, economic, competitive, technological, socio-cultural, demographic and political forces to determine the opportunities.
The environmental scanning (appraisal) is the process by which promo0ters of the companies tries to monitor the economic changes, Governmental changes, suppliers attitude and market changes to determine new opportunities and threats if any.
In simple words environmental analysis relates to identification and analysing environmental influences individually and collectively to face the future effects upon the society and business. Here the main stress is on tracing the sources of new opportunities or threats. No one can deny that it is not useful for evaluating the present strategy, new norms for future strategic decisions.
Learn about: 1. Introduction to Environmental Scanning 2. Need 3. Features 4. Components 5. Types 6. Importance and Role 7. Process 8. Sources of Information Inputs 9. Approaches 10. Techniques 11. Factors Determining the Choice of Factors for Analysis.
Environmental Scanning: Introduction, Process, Types, Importance, Approaches, Techniques, Factors, Features and Components
Environmental Scanning – Introduction
Organisations operate in a given and fast changing environment. Business strategy is formulated in response to the environment it operates in. Some organisations do not adapt to the environmental changes, and come to grief. Organisation have learnt that keeping pace with the environment provides them commercial advantages. The faster we adapt, the more competitive we become.
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Plans remain effective if they are linked to business opportunities and overcome business threats. Opportunities and threat emerge from the changing environment. Sometimes, these changes are too rapid. Organisations must have suitable warning systems, marketing research and contingency plans in place to operate successfully in the fast changing environment. The changes encountered every 5-10 years are awesome. Environment must therefore, be scanned continuously.
Organisations can gather intelligence informally by keen observation or formally in a systematic manner. A retailer sees a residential colony developing and keeps merchandise to satisfy the needs of the expanding clientele. A large business has a formal intelligence gathering arrangement that keeps the data flowing. It becomes handy while developing a business plan.
The volume of data generated becomes problematic. We have to decide which data is relevant and important.
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Environment scanning is that exercise that involves continuous process of monitoring the dynamic- interplay of all those forces namely, economic, competitive, technological, socio-cultural, demographic and political forces to determine the opportunities. In the words of L.R. Jauch and W.F. Glueck, “environmental analysis is the process by which strategists monitor the environmental factors to determine opportunities for and threats to their firms”.
Environmental diagnosis consists of managerial decisions made by assessing the significance of the data of the environmental decisions made by assessing the significance of the data of the environmental analysis. Thus, environmental scanning is both a mental task of analyzing and synthesizing.
Analyzing, in that it decides the whole into small and meaning parts for its microscopic close-up details and synthesizing, in that it is correlating and matching the parts into single whole. Thus, it projects both bird’s eye view and the fish-eye view of the forces operating in the environment.
It is that process through which an organisation monitors and understands various environmental factors and determines the opportunities and the threats that are provided by these factors.
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That means, it is the process which is made up of two sub-processes of monitoring the environment which better called as environmental search and identifying opportunities and, threats based on environmental monitoring which is precisely called as “environmental diagnosis.”
The first aspect of environmental scanning is environmental search or monitoring the environment. Stated simply environmental search is to do with collection of information from the relevant environment.
It means and includes two things namely, “What to search?” and “Where to search?” The first aspect deals with the type of environmental factors to be analysed and the second aspect with the sources of information about these environmental factors.
The Type of Environmental Factors to be Scanned:
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That way, there are countless environmental factors that influence the operation of business system of an economy. There is no need to take into all these factors because, as seen from the angle of a particular form, not all are relevant. That is why the organisation in question is to concentrate only on relevant factors of environment. The relevance of a factor will depend on the answers to two very pertinent questions.
These questions are:
(i) Whether a particular factor has an impact on the organisation?
(ii) If so, what is the degree of impact?
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The answers to two questions will generate different degrees of impact as the business or organisation and the probability of impact. A matrix can be structured, showing two variables namely the impact on business and the probability impact, to identify the “high priority” environmental factors.
A matrix of this kind can configure as under:
The matrix indicates as to what do with a given factor or factors. Thus, those factors that fall under the category of “critical” and “high priority should be analysed. If the factors fall under the category of high priority but the probability of that impact is low, it is to be kept under watch and so on.
Environment Scanning – Need
The environmental scanning (appraisal) is the process by which promoters of the companies tries to monitor the economic changes, Governmental changes, suppliers attitude and market changes to determine new opportunities and threats if any. In simple words environmental analysis relates to identification and analysing environmental influences individually and collectively to face the future effects upon the society and business. Here the main stress is on tracing the sources of new opportunities or threats. No one can deny that it is not useful for evaluating the present strategy, new norms for future strategic decisions.
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Every business fortune is influenced by social changes. Economical changes, political changes. In our country a large number of textile mills are suffering from sickness (lesser profitability). The management philosophy, practice, procedures, products and technology were out of line with changes in environment.
The only surviving textile industry is Reliance which is making remarkable progress in growth and profitability. The clear reason is that Reliance took advantage of market needs and formulated strategies so that products are related to market needs.
The true management philosophy regarding expansion and growth must be alert to new opportunities arising out of new products. The management should understand the risk and accordingly should prepare its own strategies based on environmental analysis and its proper factual assessment.
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What is the need of environmental analysis and appraisal? The answer is very simple and logical as every management is concerned mostly with opportunities for more profits and growth and at the same time helps in minimisation of future threats. The future of an organisation is related with the environment in which the business is running.
The growth and innovations and philosophy of change should be viewed with environmental effects. A fast changing business needs close study of facts: What are the probable threats to company. Some of die future events can be predicted by systematic scanning and follow up of environmental effects. The Environmental Scanning comprises information processing of social, economic, political, technological, product and changed market conditions.
The Research work on desirability of environmental analysis in U.S.A., has revealed that there is high degree positive correlation between environmental analysis and success of corporates.
The related areas which are needed for growth due to environmental analysis needs the following considerations:
(a) Firms which had to face competition, Government regulations and healthy environment.
(b) Finns which are facing environment problems and headed by risk and uncertainty.
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(c) Firms growing by mergers and thus increasing the complexity of environment.
The study revealed that corporations succeeded with little or no extra efforts at environment appraisal.
The following are such firms:
(a) Finns with slow effect of environment changes and having risk prone management.
(b) Dominant firms with moderate risk-prone management.
(c) Firms with a desire of innovation of new product.
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It is a considered opinion that increasing knowledge of the strategists in environment scanning there is a positive gain to the firm.
Environmental Scanning – Top 4 Features
The features of environmental scanning are:
Feature # 1. It is Holistic Exercise:
That is environmental scanning is not partial study but the total study of all environmental components. It is different that while explaining, these factors have been divided into specific components at general and industry level. Since it is imperative to know opportunities and threats, there is need for analyzing these factors or components together. These components are not independent but interdependent. In case we take one by one, it would be futile exercise because particular components might speak of only threats or opportunities. Hence, there is need for overall study together in order to trace the opportunities and threats.
Feature # 2. It is an Exploratory Process:
What is more important is that this process is exploratory or ‘heuristic’ as some experts put it. The monitoring of environment or environmental search is related with not only the present developments or details of components but most strategic part is concerned with exploring the unknown future. It is a process of moving from the known to the unknown. Everybody knows about future is that it is uncertain rather unknown.
“What you are?” is not that important. What is more important is “What you will be?” The crux of the problem is what could happen and not what will happen per se. That is the strategist should think of many alternative situations where step by step will be able to state clearly the postulations of the future, speculating not gambling scientifically of alternative outcomes, assessing probabilities and finally crystallizing the rational conclusions. Thus, it is a mental process involving sound judgment and juggling of impringing variables based on fertile imagination. It is an exercise of “nine-dot” puzzle.
Feature # 3. It is Continuous Process:
Environmental scanning is a continuous process that never ends. It is not ‘stop and go’ but going on forever. A continuous scanning helps to pick new signals or triggers in the overall pattern of intertwined trends. This calls for detailed and meticulous studies to have ‘close-up’ or ‘fish-eye’ view on the moving target. The track events are continuously compared and analyzed and set aside. It is like playing with different colours and finding the impact of each colour giving different shades, hues and combination meant for future reference.
Feature # 4. It is Indispensable:
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Environment scanning is so basic and strategic that strategic management swears by environment scanning. Without environmental scanning, it is almost impossible for the organisation to trace the opportunities and associated threats and the strategy formulation and implementation which speaks of future. The task of strategic management is to develop the alternative solutions of which the best one is to be implemented.
To choose, the strategist has huge stock of possible alternative solutions this generation of maximum possible alternatives; one has to depend on environmental scanning at length. Once there are exhaustive stocks of alternatives, the chooser has the best choice and rest can be avoided. Hence, environmental scanning is almost indispensable because a strategist cannot just proceed without environment scanning.
Environmental Scanning – Components
The following environmental components require scanning:
i. Political and legal
ii. Economic and demographic
iii. Social and cultural
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iv. Technological
The broad contours of environment under each heading must be drawn. Those contours which are likely to influence an organisation requires special attention.
In a globalised economy where business is done internationally, environmental scanning becomes all the more important. Domestic environment is easy to scan, but it is challenging to scan international environment. We just cannot rely on income data. We must understand a country’s demography and culture. Cultural differences do matter.
International clients must be understood to serve them better. It is essential to gather primary data as reliance on just secondary data is not enough. Our local partners or alliances are a great help in understanding international environment.
Environmental Scanning – Types: PEST Analysis, SWOT Analysis and Porter’s Five Forces Model
Environmental scanning leads to the identification of many issues that affects the organization. It results in a mass of information related to different sectors of the environment. There is a wide range of methods and techniques available for environmental scanning.
The organizations employ various methods and techniques to monitor the environment and to gather data to derive information about the opportunities and threats that affect their business.
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The process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business is known as environmental scanning. By monitoring the environment through scanning, an organization can consider the impact of the different events, trends, issues, and expectations on its process.
Since the environment facing any organization is complex and its scanning is absolutely essential, manager has to deal cautiously with the process of scanning. The environment in which an organization exists can, therefore, be described in terms of the opportunities and threats operating in the external environment apart from the strengths and weaknesses existing in the internal environment
Each Organization faces an individual and specific environment which calls for a distinct strategic plan. As part of the development of strategies and plans to enable the organization to achieve its objectives, the organization will use a systematic/rigorous process known as corporate planning which uses a SWOT analysis, ETOP, and PEST/PESTLE as a basis for the analysis of business and environmental factors.
I. PEST Analysis:
The scanning starts with an external analysis of the business environment, often called a PEST analysis, and then look at the organization’s internal strengths and weaknesses, relative to internal factors such as prior performance and also to external factors, which may have been highlighted in the PEST analysis.
The final stage is to combine the analyses to look at opportunities and threats facing the organization and to draw up plans to take advantage of the opportunities and to counter the threats.
A PEST analysis (also sometimes called a STEP, PESTLE or STEEP analysis) looks at the external business environment. PEST stands for Political, Economic, Socio-cultural and Technological. Technological factors in this case, include ecological /environmental aspects – the second E in STEEP and PESTLE, while legislative factors are included under Political (the L in PESTLE).
The analysis examines the impact of each of these factors and their interplay with each other on the business. The results can then be used to take advantage of opportunities and to make contingency plans for threats.
Political-legal environment consists of governmental legislation and regulation that can have significant effects on a company’s operations. When examining political factors, an organization needs to look at any political changes that could effect its business. What laws are being drafted? What global changes are occurring? Legislation on maternity rights, data protection, health & safety, environmental policy, should be considered, for example.
Some of the major political-legal elements that may affect an organisation are anti-trust regulations, tax laws, special incentives, foreign trade regulations, attitudes towards foreign companies, laws on hiring and promotion, stability of government etc. Political-legal environment is very important for businesses to analyse because it may stabilise or de-stabilise national markets for products.
A good example of an effect of political-legal factors on business is the difficulties faced by Mittal Steel before acquisition of French steel giant, Arcelor. Mittal Steel had to face many political obstacles because of attitude of French Government towards foreign corporate. Also the French government feared that the acquisition may lead to problems such as job losses and monopoly.
Therefore Mittal Steel was not allowed by French government to acquire Arcelor initially. Another example is of British Gas. Before 1996, British Gas had monopoly for supplying gas in UK. But in the year 1996, the British government passed the deregulation laws which opened the market for other private companies to enter in the business of supplying gas. Thus, providing huge competition for British Gas and challenging its monopoly status.
The economical environment of the country can have significant effects on the organisations and therefore they should analyse the economical environment carefully before crafting a strategy.
Major elements of economical environment that businesses may consider are GDP and GNP trends, Tax rates, interest rates, inflation rates, purchasing power parity (PPP), cost of labour, unemployment levels, valuation of currency etc. For example, businesses may enter a new country for operations with relatively high PPP so that it can have high demand for its goods.
Recently the countries like China and India have been key investments countries for foreign investors because of high GDP, high PPP and high interest rate. An example of companies using economical factors in designing their strategy is that of British Telecom. It has based its call centres in India because of availability of cheap labour. This has helped British Telecom to cut costs and increase margin of profit
Often the political factors spill over into economic factors. For example, tax is usually decided by politicians, based on a mixture of political and economic factors. Interest rates, in many countries are decided by a central bank, but political factors may still be important.
Social factors influence people’s choices and include the beliefs, values and attitudes of society. So understanding changes in this area can be crucial. Such changes can impact purchasing behaviour.
Typical things to look at for each of these include:
a. Consumer attitudes to product & industry
b. Environmental issues especially for hazardous or potentially damaging production processes
c. The influence of age, race, ethnicity, gender, stage in life cycle etc.
Not all groups have the same attitudes – and this impacts how they view products and services. Demographic changes can also play a major part. An example of the effect of socio- cultural environment on businesses is provided by Levi Strauss & Co.
Since the average age of the population in the United States increased due to decline in birth rate and improvements in health care, the company had to introduce a new line of clothing to attract the older customers under the Dockers label. Here it is seen how changes in population demographics can make the businesses change their strategy.
Advances in technology can have a major impact on business success .Technological obsolescence can make the companies go in the red and also impact socio-cultural attitudes. E.g., the way people spend their leisure has changed dramatically over the last 30 or so years.
The Internet, nanotechnology, mobile phones, and the increasing advances in computing and computers have affected the way business is transacted. Technology has changed the way products are produced and marketed.
As an example, video-conferencing has had a great influence on the business travel market. It’s no longer necessary to spend hours and money travelling for a meeting, when all participants can join in- face-to-face-through a video-conference that lacks only the physical presence of the attendees.
Technology advances has been so rapid that it has affected almost every business and keeping pace with the rapidly progressing technology has been a challenge for businesses.
In fact, these rapidly advancing technologies have given birth to new industries such as satellite TV stations, internet shopping, DVDs, virtual reality, 3D and online gaming etc. A good example is that of the SEGA games.
SEGA games had to move out of gaming consoles market and become a platform-agnostic software company, due to the competition from the new digital gaming consoles like Sony PlayStation series and Microsoft Xbox series.
For compiling a PEST analysis every factor that could possibly have an impact on the business has to be thought through. Having compiled a list of key factors, inter-relationships between factors has to be worked out. For example, the rise of the Internet (technological factors) is likely to influence consumer purchasing (social factors) – while an awareness of prices in other markets through electronic commerce may lead to a narrowing of cross-border price differences (economic).
Some factors will have the greatest potential impact on a company. These are the aspects that an organization must need to be aware of and these represent future opportunities and threats for the organization. The final stage in a PEST analysis is to use the results.
The organization has to prepare contingency plans for any threats identified. In case there are opportunities, then these should become a part of the planning. For example, a target customer group may be growing faster than other sector which is having an opportunity to increase production to take advantage of more potential customers.
In addition to using the results from PEST effectively, the organization has to develop an understanding of its own company’s capabilities. This comes from a SWOT analysis.
II. SWOT Analysis:
A SWOT analysis builds on the results of the PEST analysis, which looks at the company’s external environment. Its purpose is to identify company strengths and weaknesses so that strengths can be maintained or increased and weaknesses corrected.
It involves specifying the objective of the business or project and identifying the internal and external factors that are supportive or unfavourable to achieving that objective. SWOT is often used as part of a strategic planning process.
SWOT or TOWS is an acronym for Strengths, Weaknesses, Opportunities, and Threats.
1. Strengths:
(i) Positive tangible and intangible attributes, internal to an organization.
(ii) They are internal to and within the organization’s control.
2. Weakness:
(i) Factors that are within an organization’s control that detracts from its ability to attain the desired goal.
(ii) The areas where the organization might improve?
3. Opportunities:
(i) External attractive factors that represent the reason for an organization to exist and which it has to seize.
(ii) What opportunities exist in the environment, which will propel the organization?
Identify them by their “time frames”
4. Threats:
(i) External factors, beyond an organization’s control, which could place the organization mission or operation at risk.
(ii) The organization should have contingency plans to address them if they should occur.
(iii) Classify them by their “seriousness” and “probability of occurrence”.
Identifying the Organisation’s Opportunities and Threats:
The External Analysis examines opportunities and threats that exist in the environment. Both opportunities and threats exist independently of the firm. Opportunities refer to favorable conditions in the environment that can prove beneficial for the company if utilized effectively. Threats refer to conditions or barriers that may prevent the firms from reaching its stipulated goals and objectives.
The following areas of analysis are used to look at all external factors effecting a company:
(a) Customer analysis – Segments, motivations, needs and demands.
(b) Competitive analysis – Identify completely, put in strategic groups, evaluate performance, image, their objectives, strategies, culture, cost structure, strengths, weakness
(c) Market analysis – Overall size, projected growth, profitability, entry barriers, cost structure, distribution system, trends, key success factors
(d) Environmental analysis – Technological, governmental, economic, cultural, demographic, scenarios, information-seeking areas. Goal: To identify external opportunities, threats, trends, and strategic uncertainties
Opportunities:
An opportunity is a favourable situation in the external environment that can be used to the organisation’s advantage. For example generation of some trends at the macro-economic level by the national economy which may prove to be an advantage to the organisation.
Further, developments like identification of new markets or segments, faster market growth, raw uses of products technological changes, creation of new, related or complementary products, changes in competitive and regulatory circumstances etc., are opportunities.
Organisations must smell every opportunity, grab it and exploit it to the best of their capability; otherwise the competitors will grab the opportunity and this will beat the organisation badly. A good example of exploiting opportunities is that of Tata steel.
The Indian steel giant sensed a brilliant opportunity of entering the UK steel market by acquiring the Anglo-Dutch Corus Group steel company. It acquired it beating all the other bidders, and entered the UK market.
Threats- A threat is an unfavourable development in the external environment which can affect the organisation in a negative way. Some of the major threats face by businesses are new competitors in the industry, adverse govt. policies and regulations, rising sales of substitute products, slower market growth, growing bargaining power of suppliers or customers, adverse demographic and sociocultural changes, technological changes, etc.
A small scale supplier of cereal and grains who depended upon the local farmer may suddenly feel threatened by a big FMCG Manufacturer who has a greater capability to eat into his market share owing to economies of scale and better marketing approach.
Use of SWOT Analysis:
The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT analysis may be used in any decision-making situation when a desired end-state (objective) has been defined. Examples include- non-profit organizations, governmental units, and individuals.
SWOT analysis may also be used in pre-crisis planning and preventive crisis management. SWOT analysis may also be used in creating a recommendation during a viability study/survey.
III. Porter’s Five Forces Model:
Another important tool of designing an effective organisational strategy is the Porter’s Five Forces Model, This model is one of the widely used models in strategic management. Michael Porter’s five forces mode’ helps an organisation to craft future strategy by evaluating the forces driving competition in an industry, assessing the industry’s attractiveness for entry or exit and analysing the competitive trends.
The five forces are:
1. Threats of new entrants to the industry
2. Threats of substitute products
3. Power of buyers or customers
4. Power of suppliers (to businesses in the industry)
5. Rivalry among businesses in the industry
1. Threats of New Entrants to the Industry:
If businesses fail to analyse the threat of new firms in the industry properly it may lose its market share. Usually industries that have low entry barriers see more entry of new players into the industry, thus providing more competition to the existing players.
However, industries with high entry barriers must also not overlook the possibility of new players entering the industry. An example of Harley-Davidson justifies the above statement.
In the 1970s, the upscale motorcycle maker thought that the entry to the upscale American motorcycle industry was not easy because of capital requirements and customer loyalty.
Therefore they did not pay much attention to the Japanese entrants but the Japanese firms like Suzuki did serious damage to Harley-Davidson by making dramatic inroads into the higher end American motorcycle market with both low price and high quality.
2. Threats of Substitute Products:
Increasing availability of substitutes for an industry’s product and services can harms organisation’s control over the business. If the substitutes are equally useful for the purpose, it can pose serious threat to the product.
Therefore firms must consider the threats from substitutes seriously. Coca Cola does not only have Pepsi as a competitor but also all other beverages and thirst quenchers in the market.
3. Power of Buyers or Customers:
Buying power is the capability of the buyers and the customers of the industry to influence the demand patterns, price and the terms of purchase. When the buyers are few in number and are well organised, the buying power may be high. If the bargaining power of buyers is high then the profit margin of firms becomes low.
For example, in the retail industry, big players like ITC, future group have large number of buyers and therefore bargaining power of buyers is limited and therefore they can’t easily get a concession from the retailer.
4. Power of Suppliers (to Businesses in the Industry):
Supplier power is the capability of suppliers and vendors to influence the prices and the terms of supply. When the suppliers are few in number, the bargaining power of suppliers is high. When the bargaining power of suppliers is high, the profit margin of the firms tends to be low and vice-versa.
For example, supermarket giants Wal-Mart, Target, Tesco source their products from a large of suppliers who have low bargaining power, thus keeping its profit margin high.
5. Competitive Rivalry among Businesses in the Industry:
Competitive rivalry among firms means the extent to which the firms respond to the competitive moves of the other firm in the same industry. There might be cut-throat competition between companies where the competitive moves of the competitors are monitored and countered closely or there might be “live and let live” principle followed within the industry where companies seem to respect each other’s market niches.
The cut-throat competition has been evident between companies in different industries, Coca Cola and Pepsi war’s is a good example of the rivalry between businesses in the industry. Other Examples are the Rin vs. Tide, Horlicks vs. Complan controversies. These companies have been trying to fight each other with destructive campaigns in order to invade each other’s market share.
Each of these forces directly affects an organisation’s competitive positioning. Therefore organisations must determine the relative strength of each of these forces so that it can position itself in such a manner that it can take advantage of the opportunities and overcome the threats.
Generic Strategies:
According to Porter (1980), there are three generic types of competitive strategies which can be equally applied to any business organisation.
They are:
(a) Cost leadership
(b) Differentiation
(c) Market niche focus
Porter’s Generic Strategies:
(a) Cost Leadership:
Cost leadership means that the firms produces its goods and services at relatively low cost by taking advantage of economies of scale and the experience curve effect. In order to use this strategy the firm has to reduce costs at each stage of the business.
But in order to make this strategy successful the firm has to have significantly exclusive control on the cost of the inputs required by the firm such as raw materials, labour, etc. otherwise the competitors can easily mimic the same strategy leading to price based competition and low profitability.
Wal-Mart’s success story is a classic example of a company, which became successful by rigorously pursuing its core philosophy of cost leadership.
(b) Differentiation:
Differentiation means differentiating a product on the basis of superior performance in an important consumer benefit area. Differentiation is another generic strategy mentioned by Porter (1980) that can help firm gain competitive advantage. The concept of differentiation is idea of producing a product that is perceived unique by consumers thus giving it an edge over product. By using differentiation as a strategy firms can often command more prices for its products.
It also helps the product to be less susceptible to elastic demand; and also helps the firm to create barrier of entry for other firms. Firms can differentiate its product either by Superior product performance by adding features, improving reliability, durability, quality etc. or by Superiority of product perception achieved by marketing communication or by distributing the product more effectively than the competitors or by Providing high level and quality of service.
Sony is an example of using differentiation as a strategy. Sony has made its product range different from its competitors on the basis of high quality and design. This helped Sony to create a huge demand of its product and also made customers loyal to the brand.
(c) Market Niche Focus:
Market niche focus strategy is a strategy in which firms concentrate on the needs of a specific niche within the market. Focus strategies helps firms to shield themselves from market forces such as competitors by targeting a specific market segment. This specific market segment is also known as market niche.
The focus strategies can be through any element of marketing mix-price, product, packaging, service etc. An example of adopting market niche focus strategy is that of which is a premier airline catering to high end consumers.
Therefore, in order to formulate an effective strategy for an organisation, environmental analysis is must. However, one may observe that the main significance of external environmental analysis lies in predicting the future external environment and not the present.
If the firms are correct in predicting how the future external environment is likely to be they can design strategy well in advance to adjust to external environment. Therefore, here it understood that forecasting is a key issue while analysing the external environment.
Further one may also conclude that the PEST analysis and analysis of external opportunities and threats is also an important tool of analysing the macro-environment and micro-environment respectively. However, due to rapid changes in the external environment, firms must use these tools on a regular basis, so that the firms are not dealing with outdated information.
Last but not the least; one cannot ignore the models suggested by Michael E. Porter, that is, Porter’s Five forces model and Generic Strategy Model in order to craft an effective strategy. Porter’s five forces framework is important because it directs manager’s towards those aspects most significant to long-term advantage.
It serves as a checklist for getting started and also highlights the possible sources that could be the driving forces in businesses. Business must try and use as many tools as possible in order to come out with the best strategy for the organisation. However, firms must try and evade the limitations of these tools so as to formulate the best strategy.
Environmental Scanning – Importance and Role
One cannot underestimate the role of environmental scanning because it is indispensable and crucial. Mr. Ian Wilson, in his write up “The Benefits of Environmental Analysis” edited by Kenneth J. Albert the title “The Strategic Management Handbooks”, published by McGraw Hill N.Y. 1993, has compared the role of environmental analysis with the function of radar.
He says if a ship is sailing on a sea of uncertainty, there are two essential requirements for successful voyage. There has to be star to steer the ship. Secondly, there must be a radar to signal the existence of rock, reefs and clear water in the uncharted sea. Similarly, a business firm operating in an uncertain environment—must have a vision of the business (a guiding star) and a system of environmental analysis (radar).
In fact, empirical studies have proved beyond doubt that those firms that undertake systematic environmental scanning have fared well than those who did not. In case of companies that are right on top-say H.P., Pand G, LG, HLC, Compaq, Asian Paints, Bharat Petroleum, Reliance, Infosys, I.C.I.C.I., and the like have proved that environmental scanning has been responsible for the highest growth in Indian corporate sector.
The crucial role of environmental scanning can be explained under following heads:
1. It helps in Converting Threats into Opportunities:
Environmental scanning allows the strategists to anticipate opportunities and plan design optional or alternative responses to these opportunities. This is somewhat easy. When opportunities exist, selection is not a problem. What important is that environmental scanning, if done scientifically, helps in preventing the threats or develop strategies that can turn the threats to opportunities for the benefit of organisation.
Both these opportunities and threats are first traced and then threats are reduced to opportunities. However, one cannot take for granted that threats can be converted into opportunities. This requires a tenacity and endurance to develop the ability to scan the environment. If all the companies were able to do that, then every company would have earned good profits, growth and reputation.
2. Changing Colour of Environment:
The business environment changes are not only quick but constantly taking place. These changes create an imbalance in the organisation’s state of balance or equilibrium.
The changing colour of the organisation have to be traced by the strategists as to what causes are at work that create an imbalance in the environment, and therefore, the imbalance forced upon the organisation so that what new opportunities are thrown open by the changed environment along with the threats.
It enables the firms to develop those strategies which will help in encashing on opportunities and converting the threats into opportunities. The changes in package of opportunities and threats are to be accepted and worked upon under the broad spectrum of organisational objectives. Even it can call for changes or amendment of strategies with a view to attain the basic objectives of the organisation.
3. Narrowing Down the Alternatives:
An in depth and meaningful environmental scanning assists the strategists to reduce the range of available alternatives and eliminate options that are totally inconsistent with forecast opportunities or threats. Environmental scanning is an exercise that makes available good number of alternatives to deal with opportunities and threats.
Of these alternatives and options, which is the most viable and promising has to be traced out. It is strategists who are to work on this based on the managerial skills and experience. This is needed because the valuable time which is more than money can be saved and same can be better utilised for more pressing and important alternatives.
4. Strategic Management Starts with Environmental Scanning:
Environmental scanning is the starting point of strategic management strategy formulation and strategy implementation are the outcome of environment scanning. What the environment has for the organisation in terms of opportunities and the threats caused by changes in the environment.
To implement the strategy, the first thing is formulation of strategy. Again this strategy formulation is based on what impact the environment has on organisation in terms of opportunities and threats.
Only when the strategists trace the opportunities and threats they can proceed to develop the right strategy to encash on opportunities or converting threats into opportunities. Thus, the surfing the changing environment and tracing the opportunities and threats is the very preface to the tall task of strategy formulation and implementation.
Environmental Scanning – Process
The various processes or steps can be described as follows:
1. The assignment of environmental study project depends on the organisation and its practice of environmental study. If it is monitoring the environment on a continuous basis and some personnel are assigned for this purpose, these personnel can take up this job in addition to their duties.
However, suitable personnel can be added to take up additional load of the work. If the organisation does not have this section, a special task force can be created for the purpose which may be termed as Environmental Analysis Unit (EAU). The task between EAU and strategists should be clearly demarcated so that exact term of reference can be fixed.
The main task of EAU is to make the results of its analysis known and understood to the strategists. It should be clear to EAU that data and analysis are only one kind of input to the strategy making process. Therefore, the analysis should not expect full use of their analysis or the power to prescribe strategy.
2. The trigger is an event or set of events that initiates strategy changes or creates need for environmental data. Events serving as triggers may take place outside the organisation, e.g., a change in the Government’s policy towards foreign technical collaboration or entry of new competitor with some unique features; or hiring of a new key executive. In fact, various triggers outside the organisation force managers to take environmental studies on specific project basis.
3. Direct use of environmental analysis in strategy making requires translation of environmental analysis into specific changes. When large amount of data is collected and analysed, either strategy makers can make decisions leading to strategic changes or they may create special task force whose task may be to make environmental analysis action- oriented.
The task of the team will be to recommend actions to the strategy markers based on the environmental analysis. Effective translation of environmental analysis into specific strategic changes can be performed cooperatively by analysts, strategy markers, and task force if created.
4. Every organisation undertakes analysis of environment either on formal basis or informal basis depending on the size of the organisation, its managerial philosophy, the nature of its environment, etc. However, if environmental analysis is taken as on-going basis, it serves the organisational purpose in much better way.
Moreover, ongoing environmental study takes a much wider coverage of the environment. When an analysis is limited to specific projects, it covers only some areas in the environment leaving blind spots in others. An on-going study can locate existing and potential impact of the environment on the organisation.
This phase has to be directed by and is complementary to the phase of informal scanning. It should aim at broad coverage of the environment rather than deep analysis. This will serve two purposes it becomes complementary source for identifying perceived environmental causes for the changes in strategy, its output may serve as a trigger for strategy changes or for suggestion for detailed environmental analysis.
5. Triggers may be used as a means of strategy changes. However, strategy changes based on triggers alone may not give right direction for strategy changes but triggers must be used as the reasons for collecting appropriate information from the environment.
6. Data collection at this stage may be specific relating to the particular strategy which an organisation may consider seriously looking into various aspects, such as all those factors which go into choice of strategy. However, data collection and analysis cannot be taken just to satisfy a strategy formation based on whims of some people at the top level of the organisation.
7. The complete report then can be presented to those people who can make decision on it. Usually most of the organisations have certain specified groups of people who make strategic decisions. However, they can perform better if they work in closer contact with people responsible for scanning of environment.
8. Environmental scanning is only one kind of inputs which goes in strategy formulation. Therefore, strategy makers may not necessarily go on the basis of report prepared by environmental scanning group. However, they are affected by the informational inputs. Therefore, environmental scanning can stimulate them indirectly to go for certain strategy.
9. Need for environmental data arises because of two factors: first, the organisation is taking up environmental analysis as an on-going process and second, when some triggers are there. While the first aspect emphasises the general study of the environment, the second emphasises on specific projects or areas to be studied.
10. Strategy makers may perceive the need for strategy changes in the light of environmental factors. This awareness of environmental forces and their impact on the organisation does not come suddenly. Moreover, this awareness fluctuates over the period of time.
Environmental Scanning – Sources of Information Inputs
The study or scanning process is not difficult but not as easy as to which areas be covered and which should be left out. Researchers conducted in the late 60s and 70s being revealed that the process of environmental analysis has been far from being systematic except with regard to information relating to current developments.
Oral information from personal sources dominated the total input of information. Written and documentary information was much less frequently used by strategists. When written information were used they tended to be general information sources. Formal forecasting, if at all used, was viewed with great scepticism. Very little use was made of written studies, research reports, and meetings for environment search.
Notwithstanding research studies in the sixties and seventies and, perhaps because of these findings combined with the research findings on the beneficial effects of systematic analysis and diagnosis of external conditions the critical importance of developing as effective system of information gathering and information evaluation has been increasingly recognised over time by large enterprises.
Essentially, environmental scanning requires information inputs which can be derived from different sources:
1. Industrial Information’s:
Verbal information from such sources as the audio-visual media (radio and television); conversation among employees, managers, supervisors and subordinates; customer; distributors of the company’s products (wholesalers, dealers, retailers); suppliers; competitors and their employees, financial executives in banks; stock brokers; consultants; government employees.
2. Managerial Information’s:
Information made available through the management information system which is specially designated to serve the needs of strategic planners.
3. Written Information’s:
Written and documentary information from newspapers, trade journals, industry newsletters, reports, documented clipping services.
4. Industrial Information’s:
Industrial espionage (spying) could also be a source of information about actual and potential competitors based on contacts with the employees, suppliers or customers of the competitors. Judging by survey data and expenses incurred on systems to protect trade secrets and industrial processes, it has been observed that industrial espionage and spying have been increasing in the United States. There is very little evidence in this respect about Indian industries.
Forecasting and reports based on forecasts regarding changes in economic, social and financial conditions available from governmental agencies and other specified consultancy service organisations.
Environmental Scanning – 3 Approaches
Kubr has suggested three approaches, which could be adopted for sorting out information for environmental scanning.
1. Systematic Approach:
Gathering information for environmental scanning which have a direct impact on organizations activities, Govt. policy statements pertaining to an organization’s business and industry to monitor changes and take the relevant factors into account. Continuously updating such information is necessary not only for strategic management but also for operational activities.
2. Ad Hoc Approach:
Using this approach, an organization when undertake special projects, evaluate existing strategies, or devise new strategies; may conduct special survey and studies to deal with specific environmental issues periodically.
3. Processed – Form Approach:
When an organization uses information supplied by Govt. or private agencies, it uses secondary sources of data and the information gathered in a processed form.
Since environmental scanning is absolutely necessary for strategy formulation of any organization, whatever approaches is adapted, DATA Collection and Processing systematically is ultimate for Strategic Management Process.
Environmental Scanning – Techniques
Collection of information and its proper interpretation provide a sound basis for analyzing the opportunities and threats in the environment. A wide range of techniques is available for environmental scanning that is formal and systematic as well as intuitive methods.
Strategists may select techniques that suit their needs of environmental analysis. Glueck describes three major search techniques, i.e. information gathering, spying and forecasting. Recently ‘Benchmarking’ has emerged as another technique of environment search.
LeBell and Kraser have outlined nine techniques including single-variable extrapolation, theoretical-limit envelopes, dynamic modes, mapping, multivariable interaction analysis, unstructured expert opinion, structured expert opinion, structured inexpert opinion, and unstructured inexpert speculation. We shall discuss each of these in the following paragraphs.
In their survey of environmental scanning and forecasting in strategic planning, Fahey, King and Narayan described 10 techniques including scenario- writing, simulation, morphological analysis, PPBS, game theory- cross-impact analysis, field anomaly relation, multi-echelon coordination, and other forecasting techniques.
As the main purpose of environmental scanning is forecasting the future state of environmental factors, most of the techniques are based on the statistical methods used in forecasting. Some of these techniques like scenario writing, however, are qualitative in nature and apply informed judgment and intuition to predict the future.
Discussion of statistical technique is beyond the scope:
The management can know a great deal about environmental factors by gathering verbal as well as written information. Verbal information is collected by hearing reports from different sources informally and formally.
The major sources of verbal information are radio, television and internet, firm’s employees and from those outside the enterprise including the customers, wholesalers, brokers, suppliers, competitors and employees, bankers, stockbrokers, stock analysts, consultants and researchers, etc. By interacting with these people during various meetings and conferences, the strategists can get first-hand information about the environment.
Various publications such as reports of the government, commercial publications, research publications and publications of leading organization who from time to time study economic, technological and political factors, provide valuable information about environmental factors.
Spying is useful in knowing about potential or actual competitors. The top executives employ an individual or individuals to collect trade secrets. An employee of the competitor or his supplier or customer can also be engaged to get regular information about the competitor’s activities. A professional spy can be engaged for gathering trade secrets.
Forecasting concerns estimating those future events that would have a significant impact upon the work to be performed by the management and upon the objectives to be pursued by them. In effect, it anticipates probable occurrences rather than waiting for them to happen and merely reacting to them.
Forecasting aims to reduce the uncertainty of the future. A number of techniques have been developed with which corporate planners can effectively predict the various components of the external environment and can know the future with certainty.
With the development of more sophisticated forecasting techniques, along with the advent of computer, especially the proliferation of the personal computer and associated software, forecasting has received more and more attention. Every manager now has the ability to use very sophisticated data analysis techniques for forecasting purposes.
An understanding of these techniques is now essential for business managers. For the same reason, users of forecasts (managers) must be cautious to the improper use of forecasting techniques as inaccurate forecasts can lead to poor decisions.
There are various forecasting techniques including moving averages, exponential smoothing methods, time series analysis, simple linear regression, multiple regression analysis, Box Jenkins method, Casual Modeling etc.
The Delphi technique is a more formal version of the jury of opinion method. It was originally developed by the Rand Corporation to forecast military events. In this technique, experts from a wide variety of related fields both from inside and outside an organization’s ranks are approached to fill the detailed questionnaire about the problem under consideration without disclosing their identity.
These opinions are then compiled and the summary of the responses is sent again to the experts who are asked to review and possibly revise their estimates and if it is out of line with others, to explain the reason for this. This process is repeated several times until a consensus prediction is arrived at. When a convergence of opinion begins to occur, results are then used as an acceptable forecast.
B. Nanus proposed QUEST (Quick Environmental Scanning Technique) that uses scenario- writing for environmental scanning and developing strategic options. A scenario is “a tool for ordering one’s perceptions about alternative future environments in which one’s decisions might be played out”.
QUEST involves four steps as follows:
1. Observation about the major events and trends in the industry is made.
2. The strategists then speculate on a wide range of important issues that might affect the future of their organizations.
3. The QUEST leader writes a report summarizing the major issues and their implications, and write three to five scenarios incorporating the major themes of the discussion.
4. A group of strategists review the report and scenarios are by who identify feasible strategic options to deal with the evolving environment. The options are ranked and teams are designated to develop strategies.
This technique has become relatively widespread as a way of visualizing alternative futures. It helps in designing flexible strategies that can be developed to cope with these visions of the future.
Key characteristics of scenarios are:
1) They implicitly incorporate the subjective assessments of individuals or groups.
2) They recognize that decision makers have some influence on future development.
3) Scenarios tend to be constructed upon facts and proven assumptions that have been accurate in the past.
4) These positions are then extrapolated to create a series of alternate futures that are mutually consistent.
These scenarios predict optimistic, most likely and pessimistic future. Most recently, the most optimistic scenario is generally dropped, as this has never actually come to pass. Indeed even the most pessimistic scenario has usually tended to be more optimistic than actual reality. Most scenarios being in the present and make assumptions about the future.
It commences with a PEST ANALYSIS that identifies the critical Political, Economic, Social and Technological factors which influence both the present and the future. From this analysis, the critical indicators of the future environment are selected and any potential future events are impacted against these key trends.
Usually a series of not more than three scenarios can be developed on the basis of alternative predictions. Cross-impact analysis should also be undertaken to examine the effect of contrary variables on alternate futures. At the end a series of scenarios can be established for issue to line business units, as a background against which they can develop alternate strategic plans for their operations.
For the scenarios to be useful it is important that the scenarios must be internally consistent and the scenarios must be possible. Any scenario that is seen as highly implausible will tend to be ignored by line business units.
The brainstorming is a process wherein participants are encouraged to be open, inventive and as imaginative as possible. The issue is discussed from different angles and ideas allowed to build by themselves. The ideas generated during such sessions are separately evaluated from point of view of costs, benefits and implications.
7. The Morphological Analysis:
It is an extension of the brain storming process. In this process additional dimensions are added to the original ideas to generate still further ideas. Each idea is then critically evaluated learning only the best for critical investigation.
In the late 1970’s, the Xerox Corporation came to know the fact that their Japanese competitors were selling copiers at prices at which Xerox could not manufacture. After realizing this, Xerox decided to understand why and to learn from their competitors’ concepts such as Value Engineering and Tear Down about best practice techniques.
This has developed into the now widely practiced methodology of benchmarking. The technique is now being widely used by top US companies to learn ideas from their competitors.
Benchmarking involves the following steps:
1. The firm understands its own process in detail.
2. Study other companies that handle similar products and select the best ones.
3. Visit the best companies
4. Find out the factors responsible for better performance in terms of lower cost and better quality.
5. Take corrective measures.
Ten basic categories have been identified for designing benchmarking architecture:
(1) Customer service performance
(2) Product/service performance
(3) Core business process performance
(4) Support processes and services performance
(5) Employee performance
(6) Supplier performance
(7) Technology performance
(8) New product/service development and innovation performance
(9) Cost performance
(10) Financial performance
In designing benchmark architecture, the following steps are taken:
1. Design a system that enables management to achieve the organization’s objectives.
2. Create a common language for measuring performance consistent with the corporate culture.
3. Develop plans to collect, process, and analyze the performance measures.
In addition to careful design of the benchmarking system architecture, other critical success factors include:
1. Top management support
2. Benchmarking training for the project team
3. Suitable management information systems
4. Appropriate information technology
5. Internal corporate culture
6. Adequate resources
The precise process used for benchmarking varies from company to company, according to internal culture and needs.
Successful implementation of benchmarking systems favors simplicity. Benchmarking is not only a tool in its own right but also forms an essential component in re-engineering projects.
Environmental Scanning – Factors Determining the Choice of Factors for Analysis
The determination of the degree of impact or the probability of impact is qualitative where personal judgement plays predominant role. This subjective determination makes each firm or organisation to have differing readings as visualised by the strategist involved. There are some factors that determine the choice of factors for analysis.
These are:
It is the exact nature of environment that has impact on selection of environmental factors for analysis.
That differs from case to case:
(i) In case the organisational factor are homogeneous and stable, there is lesser need for environmental search because the organisational adaptability that takes care.
(ii) In case the environmental factors are homogenous lent changing, the organisation is to watch these changes for which it needs information. Here also one need worry as the factors are homogeneous which can be identified easily.
(iii) In case the factors are heterogeneous lent stable, the strategist is expected to identify the heterogeneous factors and the way in which they influence the organisation. Once this is done, the Organisational spot light becomes brighter as these factors do not change rapidly.
(iv) In case the environmental factors are both heterogeneous and dynamic, the work of environmental search is increased. That is what these factors are and how they are affecting is a must.
Generally the managerial philosophy determines the actions that managers will take in connection with different factors that influence their decisions. The managerial philosophy covers the managers’ attitudes, reactions to the situations, and the way they look at the variables.
If the managers are positive and forward looking they are longsighted and are interested in future. Accordingly they take active interest in collecting more and varied information about future happenings keeping in mind the present happenings. It is these positive frame of mind who give much importance to environmental scanning as they need much more information.
It is these people who strongly believe in “Opportunities knock at your door once”. That is opportunities once, missed are missed forever. It is the main reason why they need more information in framing their strategies for the future.
There are managers who are not very bold and are happy keeping themselves in day today management. These are not bothered as to what is going to happen in future. Such people hardly need information of environmental changes as they believe in “take care of present future takes care itself.”
Many times, it is the age of organisation that determines the type of information that is needed. The ager organisation has little information about environment as its managers are already swimming in the organisational changes caused by environmental changes. They are seasoned and know what is what and what the level of impact of each force is. These managers are able to distinguish between relevant and irrelevant.
The type of business the organisation is engaged is a matter that decides the length of information required. When we talk of the type of business, we talk of the way in which the business is defined. In case an organisation has defined business in narrow terms, then the focus of that organisation will be narrow as far as environment is concerned.
On the other hand, if it is broadly defined, definitely the information needed is much broad and varied. In case of a business with only one line of activity, the information needed is much lesser as opposed to a concern which is highly diversified.
5. Size and Power of the Organisation:
It has two points namely size and power. It is noticed that under normal circumstances, larger the size the more intense interaction it has with its environment. Again, it is the relative power of the organisation which plays significant role as to what is the extent of information needed. That is, to what extent an organisation can influence the environment and get influenced by environmental forces.
The findings in this connection are:
(i) The more powerful is the organisation relative to its competitors, the less it will focus on the competitive sector of the environment. The living example is that of public sector under takings in India.
(ii) The less dependent the organisation is on the government for subsidies and other facilities, less it will emphasize the environmental analysis on the political aspect of the environment.
(iii) The lesser is the dependence of the organisation on one or a few suppliers, the less it will focus its attention on the supplier aspect of the environment.
The geographic dimensions of the organisation affect the type of interaction which the organisation has with its environment. More the geographical spread more will be the information needed as each geographical place differs. It is clear that local organisations require little information as compared to multinationals.