Business Environment and Strategic Management

7/27/2019 Business Environment and Strategic Management

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DefinitionEnvironmental analysis is defined as "the processby which strategists monitor the economic,

governmental/legal, market/competitive, supplier/technological, geographic, and social settings todetermine opportunities and threats to theirfirms.

"Environmental diagnosis consists of managerialdecisions made by analyzing the significance ofthe data (opportunities and threats) of theenvironmental analysis.

Environmental analysis is an essential prerequisitefor strategic management decision-making.


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Just as the life and success of an individual

depend on his innate capability, including

physiological factors, traits and skills, to cope with

the environment, the survival and success of abusiness firm depend on its innate strength

resources as its command, including physical

resources, financial resources, skill and

organization and its adaptability to the

environment.

Types of Business Enterprise

Every business enterprise, thus, consists of a setof internal factors and is confronted with a set of

external factors.


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The internal factors are generally regarded ascontro l lable factors because the company hascontrol over these factors; it can alter or modify

such factors as its personnel, physical facilities,organisation and functional means, such asmarketing mix, to suit the environment.

The external factors, on the other hand, are, by

and large, beyond the control of a company. Theexternal or environmental factors such as theeconomic factors, socio-cultural factors,government and legal factors, demographic

factors, socio-cultural factors, government andlegal factors, demographic factors, geo-physicalfactors etc., are, therefore, generally regarded asuncontrollable factors.


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Internal

Environment

Business

Decision

External

Environment

Types of Business Environment

Value System

Mission and Objectives

Management Structure and Nature

Internal Power Relationship

Human Resources

Company Image and Brand EquityOther Factors

Micro Environment

Suppliers

Customers

Competitors

Marketing

IntermediariesPublics


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INTERNAL ENVIRONMENT

The value system of the founders and those at thehelm of affairs has important bearing on thechoice of business, the mission and objectives ofthe organisation, business policies and practices.It is a widely acknowledged fact that the extent to

which the value system is shared by all in theorganisation is an important factor contributing tosuccess.

Value System


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Mission and Objectives

The business domain of the company, priorities,direction of development, business philosophy,business policy etc., are guided by the mission

and objectives of the company.

Management Structure and Nature

The organizational structure, the composition of theBoard of Directors, extent of professionalisation ofmanagement etc., are important factors influencingbusiness decisions.


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Internal Power Relationship

Factors like the amount of support the top

management enjoys from different levels of

employees, shareholders and Board of Directors

have important influence on the decisions and

their implementation .Human ResourcesThe characteristics of the human resources like skill,quality, morale, commitment, attitude etc., could

contribute to the strength and weakness of anorganisation. Some organizations find it difficult tocarry out restructuring or modernization because ofresistance by employees whereas they are smoothly

done in some others.


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Company Image and Brand Equity

The image of the company matters while raisingfinance, forming joint ventures or other alliances,soliciting marketing intermediaries, entering purchaseor sale contracts, launching new products etc. Brandequity is also relevant in several of these cases.

Other Factors

Physical Assets and Facilities

R & D and Technological Capabilities

Marketing Resources

Financial Factors


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EXTERNAL ENVIRONMENT

It is now unquestionably accepted that the prospects

of a business depend not only on its resources but

also on the environment. An analysis of Strengths,

Weaknesses, Opportunities and Threats (SWOT) isvery much essential for the business policy

formulation.

Micro Environment

Suppliers


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Customers

The choice of the customer segments should be made

by considering a number of factors including therelative profitability, dependability, stability ofdemand, growth prospects and the extent ofcompetition.

Competitors

This competition among these products may bedescribed as desire competition as the primary task

here is to influence the basic desire of the consumer.The competition among such alternatives whichsatisfy a particular category of desire is called generic

competition.


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In other words, there is a product form competi tion.

Finally the consumer encounters the brandcompet i t ioni.e., the competition between the different

brands of the same product form.

Marketing Intermediaries

The immediate environment of a company mayconsist of a number of marketing intermediaries whichare "firms that aid the company in promoting, sellingand distributing its goods to final buyers.


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Publics

A company may encounter certain publics in itsenvironment. "A public is any group that has anactual or potential interest in or impact on anorganisation's ability to achieve its interests".

Media publics, citizens action publics and localpublics are some examples.


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MACRO ENVIRONMENT

Economic conditions, economic policies and theeconomic system are the important externalfactors that constitute the economic

environment of a business.1. The economic conditions of a country - forexample, the nature of the economy, the stageof development of the economy, economic

resources, the level of income, the distributionof income and assets, etc. are among thevery important determinants, of businessstrategies

Economic Environment


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MACRO

ENVIRONMENT

MICRO

BUSINESS

ENVIRONMENT

DEMOGRAPHIC

FACTORS

NATURAL

FACTORS

MARKETING

INTERMEDIARIES

PUBLICS COMPETITORS

Internal


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2. The economic policy of the government, needlessto say, has a very great impact on business. Sometypes or categories of business are favorably

affected by government policy, some adverselyaffected, while it is neutral in respect of others.

The scope of private business depends, to a large

extent, on the economic system. At one end, thereare the free market economies or capitalisteconomies, and at the other end are the centrallyplanned economics or communist countries. Inbetween these two are the mixed economies.Within the mixed economic system itself, there arewide variations


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Countries like the United States, Japan, Australia,

Canada and member countries of the EEC are

regarded as market economies.

China, East Germany Soviet Union,

Czechoslovakia, Hungary, Poland, etc., had

centrally planned economies. However,recently several of these countries have

discarded communist system and have moved

towards the market economy.


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Political and Government Environment

Therefore a considerable part of the attention of a

the Chief Executive and his senior colleagueshas to be devoted to a continuous dialoguewith various government agencies to ensuregrowth and profitability within the framework

of controls and restraints.The differences in language sometimes pose a

serious problem, even necessitating a changein the brand name. Preett was, perhaps, a good

brand name in India; but it did not suit in theoverseas market;


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and hence it was appropriate to adopt 'Prestige' for

the overseas markets. Chevrolet's brand name

*Nova' in Spanish means "it doesn't go". InJapanese, General Motors' "Body by Fisher"

translates as corpse by Fisher". In Japanese,

again, 3M's slogan "sticks like crazy" translates as

"sticks foolishly". In some languages, Pepsi-Cola'sslogan "come alive" translates as "come out of the

grave.

The values and beliefs associated with colour vary

significantly between different cultures. Blue,considered feminine and warm in Holland, is

regarded as masculine and cold in Sweden.


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Green is a favorite color in the Muslim world; butin Malaysia, it is associated with illness. White

indicates death and mourning in China andKorea; but in some countries, it expresseshappiness and is the color of the weddingdress of the bride. Red is a popular color in thecommunist countries; but many Africancountries have a national distaste for red color.

There are also a number of demographic factors,such as the age and sex composition ofpopulation, family size, habitat, religion, etc.,which influence the business.


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Demographic Environment

While dealing with the social environment, we must

also consider the social environment of the

business which encompasses its social respon-

sibility and the alertness or vigilance of theconsumers and of society at large.

Demographic factors like the size, growth rate, age

composition, sex composition, etc. of the

population, family size, economic stratification of

the population, educational levels, language,

caste, religion etc. are all factors which are

relevant to business.


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Natural Environment

Geographical and ecological factors, such as natural

resource endowments, weather and climatic

conditions, topographical factors, locational

aspects in the global context, port facilities, etc.,

are all relevant to business.

Physical and Technological Environment


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International Environment

The international environment is very important from

the point of view of certain categories of business.It is particularly important for industries directly

depending on imports or exports and import-

competing industries. For example, a recession in

foreign markets, or the adoption of protectionistpolicies by foreign nations, may create difficulties

for industries depending on exports. On the other

hand, a boom in the export market or a relaxation

of the protectionist policies may help the export-oriented industries. A liberalization of imports may

help some industries which use imported items, but

may adversely affect import-competing industries.


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ENVIRONMENTAL CHANGEBusiness environment is dynamic. Many elements inthe environment undergo changes. Technological

changes are frequent. Tastes and the preferences ofthe people change. The competitive situation changes.Demographic factors, including population size,change.Altitudes and value systems undergo changes.Economic factors, like income, change continuously.

Government policies and regulations also change tocope with the changing environment.All these factorsindicate that a business policy should be dynamicenough to be successfully adaptable to the changingenvironment. The success of a business depends onits ability to foresee the environmental changes and tomodify its business strategies appropriately


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TECHNIQUESFOR ENVIRONMENTAL ANALYSIS

Verbal and written information

Search and scanning

Spying

Forecasting and formal studies


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STRATEGIC MANAGEMENT

An analysis of SWOT (i.e., strengths and weaknesses

of the company and the opportunities and threats inthe environment) plays a very important role in the

strategic management process or the formulation of

business policy. A look at the strategic management

process would make the importance of the external-internal factors nexus more clear.

Glueck defines strategy as a "unified, comprehensive

and integrated plan relating the strategic advantagesof the firm to the challenges of the environment. It is

designed to ensure that the basic objectives of the

enterprise are achieved


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Strategic management is defined as that set of

decisions and actions which leads to thedevelopment of an effective strategy or strategies

to help achieve corporate objectives.

Chandler describes strategic management as the

determination of the basic long-term goals and

objectives of an enterprise and the adoption of

courses of action and allocation of resourcesnecessary to carry out these goals.


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Strategic management or business policy is the

means to achieve the objectives. Strategicmanagement process involves ascertaining the

objectives, analysis of the environmental

opportunities and threats and appraising the

strengths and weaknesses of the firm to tap theopportunities or to combat the threats, formulating

strategies to achieve the objectives on the basis of

the SWOT analysis, choosing the most appropriate

strategy, implementation of the strategy andreformulation of the objectives or strategy, if

needed


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Formulation of

Objectives

SWOT

Analysis

Consideration of

Strategic

Alternatives

Choice of

StrategyImplementation Evaluation


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A strategy is, in fact, a means to achieve the endsor objectives. Objectives should not be static, theyshould be dynamic.

To formulate clear objectives, it is essential to getdefinite answers to certain questions, viz., "whatbusiness the company is in?" "What should thecompany's business be?" "What will the

company's business be?"Environmental analysis will help find answer to thequestion what should the company's businessbe?. If 'what should be the business' is different

from 'what is the business', there is certainly aneed for redefining the business, matching thecompany resources to the environment.


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Identification of the threats and opportunities in

the environment and the strengths and

weaknesses of the firm is the cornerstone of

business policy formulation; it is these factorswhich determine the. course/courses of action to

ensure the survival and/or growth of the firm.


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STRATEGIC ALTERNATIVESAND CHOICEOF STRATEGY

A company may be confronted with severalalternatives such as:

1. Should the company continue in the samebusiness or get out of it completely or partly?

2. If it should continue in the same business,should it grow by expanding the existing units,establishing new units or by acquiring otherunits in the industry.

3. If it should diversify, should it diversify intorelated area or unrelated areas?

4. Should it grow by vertical integration?


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A company which plans to market its products in

foreign markets may have the following

alternatives:

1. Manufacture the product completely in the homecountry and export it to the foreign market.

2. Establish manufacturing facility in a free area like

an export processing zone and make exports from

there.

3. Establish manufacturing facility in the foreign

country and undertake the complete

manufacturing of the product there.

4. Manufacture the components at home and

assemble the product in the foreign market.


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5. Contract some foreign firm for manufacturing

the product and do only the marketing of it.

6. Enter into licensing agreement with a firm in

the foreign market.

7. Establish a joint venture abroad for

manufacturing and marketing the product.

The choice of the strategy should invariably be

based on the evaluation of the various

alternatives.


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IMPLEMENTATION

A good strategy is not a sufficient condition forsuccess; its effective implementation is equallyimportant. Many good strategies fail to achievethe results because of poor implementation. Itis necessary to formulate a detailed plan toachieve the objectives by means of the chosenstrategy. The term implementation is used in abroad sense so that it encompasses also the

formulation of the plan to implement thestrategy.


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In a multi-unit business, formulation of different

levels of strategies is an essential and

important aspect of implementation. There are

three levels-of strategies applicable to such a

business.

Corporate Level Strategy :This is the master

strategy to achieve the overall corporate

objectives. The other levels of strategies are

designed to implement the corporate strategyand they are, therefore, formulated with

reference to the corporate strategy.


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SBU Level Strategy :It is the strategy to achieve

the specific objectives of the strategic

business unit (SBU) so as to help achieve the

overall corporate objectives. A SBU is an

operating division of a firm which serves a

distinct product/market segment or a well-defined set of customers or a geographic area.

The SBU is given the authority to make its own

strategic decisions within corporate guidelines

as long as it meets corporate objectives. TheSBU is also known as operating division.


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Func t ional Level Strategy :

The task of implementation involves mobilization

and deployment of resources, including

personnel, needed for implementation,

organizing and assigning tasks to the variouselements of the organization. For effective

implementation of the strategy it is essential to

formulate an implementation strategy.


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EVALUATION

Evaluation of strategy is that phase of the

strategic management process in which thetop managers determine whether their

strategic choice as implemented is meeting the

objectives of the enterprise

Failure to achieve the results may arise from any

one or more of the following:

1. Improper implementation of the strategy.

2. Environmental changes which were notanticipated while formulating the strategy.


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3. Inappropriate strategy.

Improper implementation of the strategy may bedue to

a) inappropriateness of the implementationstrategy.

b) inefficiency and/or lack of commitment of thepersonnel in charge of implementation.

c) wrong assignment of the tasks; or

d) inadequacy of resources.

Environmental changes such as increase in

competition, changes in consumer preferencesor altitudes, technological changes whichcould not be anticipated while formulating thestrategy etc. may come in the way of achieving

the results.


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CONCLUSION

The key to business success is the most effective

utilization of the company's resources(resources here mean not only the existing

resources but also the additional resources it

can mobilize and augment for any specific

task). This involves the evaluation of thecompany's strengths and weaknesses in the

light of the environmental threats and

opportunities and taking appropriate measures

to harness the opportunities or to combat the

threats and formulation of strategies

accordingly.


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Environmental analysis comprises scanning, monitoring, analyzing, and

forecasting the business situation.

Environmental analysis process is not static but a dynamic process. It may

differ depending on the situation. However, a general process with few

common steps can be identified as the process of environmental analysis

these are a) Monitoring or identifying environmental factors, b) Scanning andselecting the relevant factors and grouping them, c) Defining variables for

analysis, d) Using different methods, tools, and techniques for analysis, e)

Analyzing environmental factors and forecasting, f) Designing profiles, and g)

Strategic positioning and writing a report. Brief discussion is made on each of

the step of this environmental analysis process.

Documents

Business Environment and Strategic Management