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MYNOTES ON STRATEGIC MANAGEMENT FOR CA-INTERMEDIATE (IPC)

C EHAPT R 1 – B EUSIN SS E MENVIRON NT

1. WHAT IS BUSINESS??? The term ‘business’ refers to all economic activities pursued mainly to satisfy the material needs of society, with the purpose of earning profits. Such activities include exchange of goods and services on a regular basis and carry an element of risk and uncertainty. Manufacturing, trading mining, banking, transport, insurance, etc., are all different types of business.

2. OBJECTIVES OF A BUSINESS

Every business functions with certain set objectives in mind. Every business has a goal that it tries to achieve in order to remain in the market and earn revenues. The objectives of any business are as follows:

1. Survival:It is not necessary for a business that is currently in the market to remain there in the long run. The longevity of a business is not sure. Therefore for a business to remain in the market it is necessary to ensure its survival to protect the interests of those associated with it. Survival depends upon many internal and external factors like competition, technological changes, state of economy and type of ownership.

2. Stability:Every organisation aims at stable and consistent working. A business must be able to fulfill its objectives without much tensions and fluctuations in day-to-day operations.

3. Growth:After earning sufficient profits, every business aims at increasing returns in future to ensure growth of business with time. Growth can be seen in terms of increase in profits and assets, turnover, manufacturing capacity, market share, number of employees, business acquisitions, and so on.

4. Efficiency: It is very important to achieve goals efficiently to ensure attractive profits and other qualitative aspects related to the business. It is an operational objective and measured in terms of input–output ratio, consumption of resources, efforts made, etc.

5. Profitability:Profit making is the main, but not the only objective, of any business. It is also the primary unit or yardstick of measurement of performance and efficiency of a business. The performance of any business is judged mainly by its profit margin and revenues. Although maximisation of profit may not be aimed in the short run, every business aims at wealth maximisation in the long run by earning good profits.

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L CHAPTER 1 – BUSINESS ENVIRONMENT

3. ENVIRONMENTAL INFLUENCES ON BUSINESS 1) Business does not function in an isolated world. 2) Businesses function within a whole gambit of relevant environment and have to

negotiate their way through it. 3) The extent to which the business thrives depends on the manner in which it interacts

with its environment. 4) To be successful business has to not only recognise different elements of the

environment but also respect, adapt to or have to manage and influence them. 5) The business must continuously monitor and adapt to the environment if it is to

survive and prosper. 6) A successful business has to identify, appraise, and respond to the various

opportunities and threats in its environment.7) Business functions as a part of broader environment. 8) The inputs in the form of human, physical, financial and other related resources are

drawn from the environment. 9) The business converts these resources through various processes into outputs of

products and/or services.10) The latter are partly exchanged with the external client groups, say customers. The

exchange process brings in some surplus (or profits, reputation, good public image and so on) to the business, which could be stored and used for further development and growth.

11) The exchange with the environment brings in some surplus and goodwill, etc., to the business, which is essential for survival and growth.

4. PROBLEMS IN UNDERSTANDING THE ENVIRONMENTAL INFLUENCES 1) The environment encapsulates many different influences; Environment hides

many different factors which influence business, so listing all environmental influences may be possible, but it may not be of much use because no overall picture emerges of really important influences on the organization.

2) The second difficulty is that of uncertainty. Technological change and the speed of global communications mean more and faster change makes difficult for managers to understand future external influences on an organization.

3) Managers are no different from other individuals in the way they cope with complexity. Like a normal human being, managers generally tend to simplify complexity by focusing on aspects of the environment, which have been historically important. One of the tasks of the strategic manager is to find ways to break out of oversimplification or bias in the understanding of environment, while still achieving a useful and usable level of analysis.

5. FRAMEWORK TO UNDERSTAND THE ENVIRONMENTAL INFLUENCES Framework help in identifying key issues, find ways of coping with complexity and also assist in challenging managerial thinking.

Firstly, take an initial view of the nature of the organizations environment in terms of how uncertain it is. This helps in deciding what focus the rest of the analysis is to take.

The next step might be the auditing of environmental influences to identify which of the many different environmental influences are likely to affect the organization's

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development or performance. This is done by considering the way in which political, economic, social and technological influences have a bearing on organizations.

The final step is to focus more towards the immediate environment of the organization - for example, the competitive arena in which the organization operates. In competitive environment we will study five forces analysis that aims to identify the key forces at work in the immediate or competitive environment. It is also required to analyse the organization's competitive position: that is, how it stands in relation to those other organizations competing for the same resources, or customers, as it-self.

6. ENVIRONMENTAL ANALYSIS Environmental Analysis refers to detailed evaluation of the external environment, in terms of the opportunities and threats, and the internal environment, in terms of the strengths and weaknesses, to ensure survival, stability, growth and profitability of any organisation. A systematic approach to understanding the environment is the SWOT analysis.

Basic and Additional GoalsIn general, environmental analysis has three basic goals, which are as follows:

1) To provide an understanding of current and potential changes taking place in the environment.

2) To provide inputs for strategic decision making.3) To facilitate strategic thinking in organisations.

For example developments in the legal environment including introduction of new direct tax code, limited liability partnership, GST, etc. have their own bearing on the business.

7. CHARACTERISTICS OF BUSINESS ENVIRONMENT

1) Environment is complex - The environment is not made of any one simple constituent but consists of a number of factors, events, conditions and influences, arising from different sources. Hence, environment is at the same time complex and somewhat easy to understand in parts, but difficult in totality.

2) Environment is dynamic : the environment is constantly changing in nature. Due to the many and varied influences operating, there is dynamism in the environment causing it to continuously change its shape and character.

3) Environment is multi-faceted : Same element or influence of environment affects different firms in different ways. This is frequently seen when the same development, say liberalisation, is welcomed as an opportunity by one company while another company perceives it as a threat.

4) Environment has a far reaching impact : The environment has a far reaching impact on organizations. The growth and profitability of an organization depends critically on the environment in which it exists. Any environment change has an impact on the organization in several different ways.

8. COMPONENTS OF BUSINESS ENVIRONMENT The environment in which an organization exists could be broadly divided into two

parts the external and the internal environment. The external environment includes all the factors outside the organization which

provide opportunity or pose threats to the organization.


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The internal environment refers to all the factors within an organization which impart strengths or cause weaknesses of a strategic nature.

The four environmental influences could be described as follows:o An opportunity is a favourable condition in the organization's environment

which enables it to consolidate and strengthen its position.

o A threat is an unfavourable condition in the organization's environment which creates a risk for, or causes damage to, the organization. An example of a threat is the emergence of strong new competitors who are likely to offer stiff competition to the existing companies in an industry.

o A strength is an inherent capacity which an organization can use to gain strategic advantage over its competitors. An example of a strength is superior research and development skills which can be used for new product development so that the company gains competitive advantage.

o A weakness is an inherent limitation or constraint which creates a strategic disadvantage. An example of a weakness is over dependence on a single product line, which is potentially risky for a company in times of crisis.

This systematic approach to understanding the environment is known as SWOT analysis. Business firms undertake SWOT analysis to understand the external and internal environment. SWOT, which is the acronym for strengths, weaknesses, opportunities and threats. This will be discussed in more detail in later chapters.

9. RELATIONSHIP BETWEEN ORGANIZATION AND ITS ENVIRONMENT The relationship between an organisation and its environment may be discussed in terms of interactions between them in several areas, which are as follows:

1) Exchange of Information Organisations scan environmental information and use it for planning, decision

making and control. Organisations transmit information to several internal and external agencies like

govt., investors, trade unions and professional bodies.

2) Exchange of Resources Inputs to a business, like materials, men, money and machines, are drawn from

environment. Output in the form of goods and services is supplied to the environment.

3) Exchange of Influence and Power Environment transmits opportunities and threats. Environment has a considerable stronghold over an organisation by virtue of its

command over inputs. Government controls the organisation through legitimate power; markets,

suppliers, etc., influence the planning and decision making of the organisation. An organisation also influences the environment through its command over

internal resources and capacity to provide output.


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10. THE MICRO AND MACRO ENVIRONMENT

Micro-environment Macro-environmentIt refers to all the factors which are specific to an organisation and impart strengths or cause weaknesses of a strategic nature. These affect the organisation on an immediate basis but are relatively controllable.

It refers to all the factors which are common for all organisations, provide opportunities or pose threats to them and are relatively uncontrollable.

These factors include the following:a) Marketb) Organisationc) Intermediariesd) Supplierse) Consumer/Customerf) Competitors

The factors include the following:a) Demographic environmentb) Economic environmentc) Political-legal cum Government environmentd) Socio-cultural environmente) Technological environmentf) Competitive environmentg) Global environment

11. ELEMENTS OF MICRO ENVIRONMENT Micro-environment is the specific or the task environment of a business which affects its working or operations directly on a regular basis. While the changes in the macro-environment affect business in the long run, the effects of changes in the micro-environment are noticed immediately. Hence, organisations must closely analyse and monitor all the elements of the micro-environment on a regular basis. The elements of microenvironment are as follows

1. Consumers/Customers: No organisation can survive without customers and consumers. A customer is the one who buys a product or service for the consumer who ultimately consumes or uses the product or service of the organisation. Hence, the consumer occupies the central position; therefore an organisation must closely monitor and analyse the following:

a) Who are the customers/consumers?b) What features or benefits are they looking for?c) What are their income levels?d) What are their tastes, preferences?e) What are their buying patterns, etc?

2. Competitors: Competitors are the other business entities that compete for resources as well as markets. A study of the competitive scenario is essential for the marketer, particularly threats from competition. Following are a few of major questions that may be addressed for analysing competitions:

Who are the competitors?


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Environmental Scanning Environment must be

scanned so as to determine development and forecasts of factors that will influence organizational success.

Environmental scanning can be defined as the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business for the purpose of taking strategic decisions.

Scanning must identify the threats and opportunities existing in the environment.

The factors which need to be considered for environmental scanning are events, trends, issues and expectations. These factors are explained below:

a. Events are important and specific occurrences taking place in different

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What are their present strategy and business objective? Who are the most aggressive and powerful competitors?

Competition may be direct or indirect. Direct competition is between organizations, which are in same business activity. At the same time competition can also be indirect. For example, competition between a holiday resort and car manufacturing company for available discretionary income of affluent customers is indirect competition.

3. Organisation: An organisation refers to a group of all individuals working in different capacities and the practices and culture they follow. In micro-environment analysis, nothing is as important as self-analysis, which is done by the organisation itself. Understanding one’s own strengths and weaknesses in a particular business is of vital importance. Organisations consist of specific groups of people who are likely to influence an organization, which are as follows:

a) Owners–Proprietor, partners, shareholders, etc., who invest resources and also make major decisions for the business.

b) Board of directors–Elected by shareholders, the board is responsible for day-to-day and general management of the organisation to ensure that it is being run in a way that best serves the shareholders’ interests.

c) Employees–People who actually do the work in an organisation. Employees are the major force within an organisation. It is important for an organisation to have its employees embrace the same values and goals as the organisation. However, they differ in beliefs, education, attitudes, and capabilities. When the management and employees work towards different goals, everyone suffers.

3. Market: Market refers to the system of contact between an organisation and its customers. The firm should study the trends and development and the key success factors of the market, which are as follows:

a) The existing and the potential demand in market b) Market growth ratec) Cost structure d) Price sensitivitye) Technological structure f) Distribution system, etc

4. Suppliers: The suppliers refer to the providers of inputs, like raw materials, equipment and services, to an organisation. Large companies have to deal with hundreds of suppliers to maintain their production. Suppliers with their own bargaining power affect working and cost structure of the industry. Hence it is important for an organisation to carry out a study of the following:

a) Who are the suppliers?b) What are their products, prices and terms and conditions?c) Whether to “Outsource” production or get it done “in-house” depending on this supplier environment, and so on.

5. Intermediaries: Intermediaries include agents and brokers who facilitate the contact between buyers and sellers for a commission. They may exert a considerable influence on the business organisations as, in many cases, the consumers are not aware of the manufacturers and their products. Hence, manufacturers use intermediaries to reach out to consumers.


Environmental Scanning Environment must be

scanned so as to determine development and forecasts of factors that will influence organizational success.

Environmental scanning can be defined as the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business for the purpose of taking strategic decisions.

Scanning must identify the threats and opportunities existing in the environment.

The factors which need to be considered for environmental scanning are events, trends, issues and expectations. These factors are explained below:

a. Events are important and specific occurrences taking place in different

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12. ELEMENTS OF MACRO ENVIRONMENT Macro-environment is the general environment of a business which affects its working on a broader basis in the long run. The organisations must closely analyse and monitor all the elements of macro-environment. The elements of macro-environment are as follows:

1. Demographic Environment: The term ‘demographic’ denotes characteristics such as age, income, education, asset ownership, home ownership, employment status, etc. of the population in an area, district, country or world.Data with respect to these factors are of interest to businessmen because of their impact on the business. In particular, the following demographic characteristics or elements of a population are of interest to a business:(i) Population Size: It is very important to understand population size and the changes in a population size like:

• Changes in a nation’s birth rate and/or family size• Increases or declines in the total population• Effects of rapid population growth on natural resources or food supplies

Such study is very helpful in framing suitable strategies for a business.(ii) Geographic Distribution: Population shifts from one region of to another like from non-metropolitan to metropolitan areas to search for employment. It may have an impact on a company’s strategic competitiveness. Some important issues may be as follows:

• Attractiveness of a company’s location and respective governmental support• Need to relocate the company if population shifts• Concept of working-from-home electronically, implying changes in recruitment and management of the workforce.

(iii) Ethnic Mix: This reflects the changes in the social value system of a population and has implications both for a company’s potential customers and for the workforce. Issues that should be addressed include the following:

• What changes in the ethnic mix would need a new product and service design and delivery?• Will new products and services be demanded or can the existing ones be modified?• Are the managers prepared to manage a more culturally diverse workforce?

(iv) Income Distribution: Changes in income distribution are important because changes in the levels of individual and group purchasing power and discretionary income often result in changes in spending (consumption) and savings patterns. Tracking, forecasting, and assessing changes in income patterns may identify new opportunities for companies.



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2. Economic Environment: The economic environment refers to the general economic situation in the region and the factors like resource markets (money market, manpower market, raw material components, services, supply markets, and so on) which influence the supply of inputs to the enterprise, their costs, quality, availability and reliability. The important point is to find out the effect of economic prospect and inflation on the operations of the firms. Strategists must scan, monitor, forecast, and assess a number of key economic factors mentioned in the table below for both.

3. Political-legal Environment: Political-legal Environment is a collection of factors, such as the general state of politics, the degree of politicalisation of business and economic issues, the level of political morality, the law and order situation, political stability, the political ideology and practices of the ruling party, the purposefulness and efficiency of governmental agencies, the extent and nature of governmental intervention in the economy and the industry, Government policies (fiscal, monetary, industrial, labour and export-import policies), specific legal enactments and framework in which the enterprise has to function and the degree of effectiveness with which they are implemented, public attitude towards business in general and the enterprise in particular, and so on.There are three important elements in political-legal environment. These elements are as follows:

i) Government: A business is highly guided and controlled by government policy. Hence the type of government running a country is a powerful influence on any business; a strategist has to consider the changes in the regulatory framework and their impact on the business. Taxes and duties are other critical areas that may be levied and that affect the business. For example, introduction of FBT (Fringe Benefits Tax) has a major impact on the business.

ii) Legal: Business organisations prefer to operate in a country where there is a sound legal system. However, in any country, businesses must have a good working knowledge of the major laws protecting consumers, competitions and organisations. Businesses must understand the relevant laws relating to companies, competition, intellectual property, foreign exchange, labour, and so on.

iii) Political: Apart from Govt. and Legal factors there are several other political pressures that influence and limit organisations. Political uncertainty, political


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movements against certain products, service and organisations, politicalisation of trade unions, etc., put a lot of pressure on business organisations.

4. Socio-cultural Environment: Socio-cultural environment is a collection of social factors affecting a business and includes social traditions, values and beliefs, level of literacy and education, the ethical standards and state of society, the extent of social stratification, conflict and cohesiveness, and so forth. Socio-cultural environment consists of factors related to human relationships and the impact of social attitudes and cultural values on the business of the organisation. The beliefs, values and norms of a society determine how individuals and organisations should be inter-related. The core beliefs of a particular society tend to be rigid. It is difficult for businesses to change these core values, which become a determinant of its functioning. Some of the important factors and influences operating in this environment are as follows:

a) Social concerns, such as the role of business in society, environmental pollution, corruption, use of mass media, and consumerism.

b) Social attitudes and values, such as expectations of society from business, social customs, beliefs, rituals and practices, changing lifestyle patterns, and materialism.

c) Family structure and the changes in it, attitude towards and within the family, and family values.

d) Role of women in society, position of children and adolescents in family and society.

e) Educational levels, awareness and consciousness of rights, and work ethics of members of society.

5. Technological Environment: It is a collection of technological factors affecting a business. It includes scientific advancements and changes of manufacturing, banking, communication, entertainment and all other aspects of changing people’s life. The following factors are to be considered for the technological environment:

a) Change in technologyb) Opportunities arising out of technological innovationc) Risk and uncertainty of technological developmentd) Role of R&D in a country and government’s R&D budget

The key questions that can be asked in assessing the technological environment are as follows:

a) What are the technologies used by the company?b) What additional technologies will be required?d) How critical is each technology to each of these products and businesses?c) Which technological investments should be curtailed or eliminated?The interference between technology and business can be represented as follows:

6. Competitive Environment: Competitive environment refers to a collection of various firms with same, similar or substitute products/services/customers/resources or any other common area. Identify and concentrate on the competitors who are significantly affecting the business. A better understanding of the nature and extent of competition may be reached by answering the following questions:

a) Who are the competitors? b) What are their product and services?c) What are their market shares? d) What are their financial positions?


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e) What gives them cost and price advantage?

f) What are they likely to do next?

g) Who are the potential competitors?

Cooperation in a Competitive Environment: Theoretically, cooperation generates automatically in businesses owned by a same family. However, Cooperation in a competitive environment can be ensured through techniques like cartel formation, explicit contracting, etc.

Cooperation Technique

Description

Cartels Cartels is a term from economics, to define the groups of firms in an oligopoly acting together. The cooperation in organisations forming a cartel may be in form of decisions regarding prices and plans. Organisations may form open cartels known to the general public or secret cartels not known to the general public.

Explicit contracts Explicit contracts are the second option for cooperation between firms. Firms may identify some common interest for cooperation between them and write such arrangements that help all those who are involved.

Keiretsu Keiretsu is a set of companies with interlocking business relationships and share holdings. It is a type of business group where member companies prefer to do business with other keiretsu members, both when buying and when selling. It refers to a group of companies, usually in related Keiretsu is a set of companies with interlocking business relationships and share holdings and usually join for cooperation on specific terms. Keiretsu members are peers and may own significant amounts of each other’s stock, common purchasing, common distribution channels or other functions in common and even have many board members in common

Family Ownership Family Ownership generates cooperation automatically as members prefer to do businesses with firms owned by the same family. The common interests of the family largely influence the managerial decisions and activities of the enterprise.

7. Global Environment: Global environment refers to the environment in all other countries over the world. Today, economies are open, which means they can interact with economies of other countries. Hence, globalisation has become a very important business strategy. Globalisation refers to the process of spreading the business out of one country to other parts of the world by removing political, geographical and other barriers among countries. For example, companies like Nestle, Cadbury, etc, have several manufacturing locations and markets around the world.A company which has a global presence is called a multinational company (MNC) or a transnational company (TNC). An MNC, by operating in more than one country, gains R&D, production, marketing and financial advantages in its costs and good will which are not available to its purely domestic competitors.

Three Characterstics of a Global CompanyTo be specific, a global company has three characteristics which are as follows:


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1) It is a conglomerate of multiple units (located in different parts of the globe) but all linked by common ownership.

2) Its multiple units draw on a common pool of resources, such as money, credit, information, patents, trade names and control systems.

3) The units respond to some common strategy.

Strategic Approaches for GlobalisationInternational economic dynamics accompanied by geographical changes have changed the paradigm of global business. A firm / company which wishes to go global will be guided by the following four types of strategies:

(i) Multi-domestic strategy : A multi-domestic strategy focuses on competition within each country in which the firm operates. The organization attempts to extensively customize their products and services according to the local conditions of different countries.

(ii) Global strategy : A global strategy assumes more standardization of products across country boundaries. Under this strategy, the company tries to focus on a low cost structure by leveraging their expertise in providing certain products and services and concentrating the production of these standard products and services at a few favourable locations around the world. Competitive strategy is centralized and controlled by the home office.

(iii) Transnational strategy : Many large multinational firms, particularly those with many diverse products, may use a multi-domestic strategy with some product lines and a global strategy with others. A transnational strategy seeks to combine aspects of both multi-domestic and global strategies. Thus there is emphasizes on both local responsiveness and global integration and coordination.When a firm adopts one or more of the above strategies, the firm would have to take decisions on the manner in which it would commence international operations. The decision as to how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved through following options:

• Exporting.• Licensing/ Franchising.• Joint Venture.• Foreign Direct Investment.

Why do companies go global?There are several reasons why companies go global. These reasons are as follows:

a) Rapid shrinking of time and distance across the globe due to faster communication, speedier transportation, growing financial flows and rapid technological changes

b) Domestic markets are no longer enough to absorb whatever is produced.c) Foreign markets have become large enough to justify foreign investment.d) Reliable or cheaper resources available in other countries, e.g., cheap labour in India

attract foreign investors.e) To reduce high transportation costs in case of exports to remote countries.f) To improve sales volume to support high overheads or R&D expenses like in

electronics and technology products.

Manifestation of Globalisation


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1) Configuring anywhere in the world - An MNC can locate its different operations in different countries on the basis of raw material availability, consumer markets and low-cost labour.

2) Interlinked and interdependent economies - Economies are increasing international trade as each country’s prosperity is interlinked with the rest of the world. No nation can any longer succeed alone without international trade and assistance.

3) Lowering of trade and tariff barriers - The trade tariffs and custom barriers are getting lowered, resulting in easy foreign trade and cheaper and abundant supply of goods internationally.

4) Increasing trend towards privatization - Governments everywhere are withdrawing from owning and running business enterprises. Private entrepreneurs are given greater access and freedom to run business units who are in no way committed to work in their own country only.

5) Market-side efficiency - Integration of global markets implies that costs, quality, processing time, and terms of business become very important. Customers can make a genuine choice of products and services on the basis of maximum value for money.

6) Formation of regional blocks - The signing of cooperation treaties, like SAARC, create new markets and manufacturing opportunities for member countries and threaten to disrupt the plans and strategies of non-members.

7) Mobility of skilled resources: Skilled labour was once considered to be the decisive factor in plant location and even in determining comparative advantage of a nation. Modern factories use highly skilled labour which is freely mobile. Where labour is unskilled, managements are spending vast sums of money to train workers become skilled in their jobs.

13. PESTLE ANALYSIS The term PESTLE is used to describe a framework for analysis of macro

environmental factors. PESTLE analysis involves identifying the political, economic, socio-cultural,

technological, legal and environmental influences on an organization and providing a way of scanning the environmental influences that have affected or are likely to affect an organization or its policy.

PESTLE analysis is an increasingly used and recognized term, replacing the traditional framework for monitoring environment known as PEST analysis.

The Key Factors

1) Political factors are how and to what extent a government intervenes in the economy and the activities of corporate. Furthermore, governments have great influence on the health, education and infrastructure of a nation.

2) Economic factors have major impacts on how businesses operate and take decisions. For example, interest rates affect a firm's cost of capital and therefore to


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what extent a business grows and expands. The money supply, inflation, credit flow, per capita income, growth rates have a bearing on the business decisions.

3) Social factors affect the demand for a company's products and how that company operates.

4) Technological factors can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.

5) Legal factors affect how a company operates, its costs, and the demand for its products.

6) Environmental factors affect industries such as tourism, farming, and insurance. Growing awareness to climate change is affecting how companies operate and the products they offer--it is both creating new markets and diminishing or destroying existing ones.

These are the factors that require to be considered in the matrix. Then transpose the final items that we have identified from your list to a PESTLE matrix.



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14. STRATEGIC RESPONSES TO THE ENVIRONMENT For any organisation to live and survive, it is important that it responds positively to its environment and the changes in it. The strategic responses of an organisation to its environment are as follows:

1. Least resistance : Some businesses just manage to survive by way of coping with their changing external environments. They are simple goal-maintaining units. They are very passive in their behaviour and are solely guided by the signals of the external environment. They are not ambitious but are content with taking simple paths of least resistance in their goal-seeking and resource transforming behaviour.

2. Proceed with Caution - It is a reactive type of response where organisations take intelligent steps to adapt with the changing external environment. These organisations monitor the changes in that environment, analyse their impact on their own goals and activities and translate their assessment in terms of specific strategies for survival, stability and strength.

3. Dynamic Response - It is a proactive type of response where businesses regard the external environmental forces as partially manageable and controllable by their actions. Not only do they recognise and ward off threats, they convert threats into opportunities. They are highly confident of their strengths and conscious of their weaknesses.

Shaping external environment

Although it is not possible to shape the external environment, an organisation can try to regulate environmental influences to its advantage.

External environment in larger and more inclusive than the individual organization; presumably the former commands more resources and its interests and values are much broader than those of the latter.

An innovative and autonomous organization generates its own constraints. It is not above the rule of law and logic of the external environment. Within certain limits, such an organization can shape part of its relevant external environment on a reciprocal basis.

15. PORTER’S FIVE FORCES MODEL - COMPETITIVE ANALYSIS Porter’s five forces model of competitive analysis is a powerful and popular tool for assessing the main competitive forces in any industry and their strength and importance to an organisation. This model holds that the state of competition in an industry is the sum of competitive pressures operating in five areas of the overall market:

1) Competitive pressures associated with the market maneuvering and jockeying for buyer patronage that goes on among rival sellers in the industry.

2) Competitive pressures associated with the threat of new entrants into the market.3) Competitive pressures coming from the attempts of companies in other industries to

win buyers over to their own substitute products.4) Competitive pressures stemming from supplier bargaining power and supplier-seller

collaboration.5) Competitive pressures stemming from buyer bargaining power and seller-buyer

Collaboration.


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The way one uses the five-force model to determine what competition is like in a given industry is to build the picture of competition in three steps:

Step 1: Identify the specific competitive pressures associated with each of the five forces.

Step 2: Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate to normal, or weak).

Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits.

Now let’s discuss the 5-factors in detail…

a) Rivalry among current players: There is always a tough fight in any industry among current players. Rivalry among existing players can affect the prices, quality, profitability etc. to a great extent. All existing firms try to do their best in terms of products, prices, costs, services to customers, production facilities, product development, advertising, sales force, etc.

b) Threat of new entrants: New entrants are always a powerful source of competition because they generally enter with new products/offers/capacities /product range, etc. The bigger the new entrant, the more severe the competitive effect. New entrants also place a limit on prices and affect the profitability of existing players.

c) Bargaining power of customers: There is always a threat to the loyalty of a customer. Particularly in competitive markets,the customer always has a dominating position. The bargaining power of a customer increases when there are new entrants or substitutes in market.

d) Bargaining power of suppliers: If the suppliers are limited in number or if they have other buyers then they can show their bargaining power. They may demand better prices for raw materials and other inputs of the industry and, therefore determine industry attractiveness and profitability.


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e) Threats from substitutes: Substitute products offering a better price and/or performance to the consumer can drastically change the competition in an industry. For example, expensive cotton clothes are mainly replaced by inexpensive and durable polyester clothes. Substitutes usually limit the sales, prices and profits in an industry.


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