STRATEGIC MANAGEMENT STRATEGIC MANAGEMENT AND BUSINESS POLICY

THIRD EDITIONTHIRD EDITION

Chapter 3Environmental appraisalEnvironmental appraisal

AZHAR KAZMI

Learning objectivesDescribe the concept of environment in the Describe the concept of environment in the context of strategic managementExplain the process of SWOT analysisp p yName, describe, and exemplify eight environmental sectorsD ib th f i t l Describe the process of environmental scanningPrepare Environmental Threats and Prepare Environmental Threats and Opportunities Profile (ETOP) for an organization

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Concept of environmentTh i t f i tiThe environment of any organisationis "the aggregate of all conditions,events and influences that surroundevents and influences that surroundand affect it."Environment means the Environment means the surroundings, external objects, influences or circumstances under influences or circumstances under which someone or something exists.

3K. Davis, The Challenge of Business, (New York, N.Y.: McGraw-Hill, 1975),p.43

Characteristics of environmentE i t i l Environment is complex Environment is dynamic Environment is multi-faceted Environment has a far-reaching impact

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Characteristics of environment

E i t i l Th i tEnvironment is complex: The environmentconsist of number of factors, events, conditionsand influences arising from different sourcesand influences arising from different sources.All these do not exist in isolation but interactwith each other to create an entirely new set ofwith each other to create an entirely new set ofinfluences.

E i t i d i Th i t iEnvironment is dynamic: The environment isconsistently changing in nature. Due to manyand varied influence operating there isand varied influence operating, there isdynamism in the environment causing it tocontinuously change its shape and charactercontinuously change its shape and character.

Environment is multi faceted: What shape andEnvironment is multi faceted: What shape andcharacter an environment assumes depends onperception of observer. A particular change inp p p genvironment or a new development may be vieweddifferently by different observers.E i t h f hi i tEnvironment has a far reaching impact onorganizations. The growth and profitability of anorganization depends critically on environment ing p ywhich it exists. Any environmental change has animpact on organization in several different ways.

Internal environmentThe internal environment refers to all factorsThe internal environment refers to all factorswithin an organisation that impact strengths orcause weaknesses of a strategic nature.

Strength is an inherent capacity which an organisationcan use to gain strategic advantage. Examples ofstrength are: good reputation among customers,resources assets people experience knowledge dataresources, assets, people, experience, knowledge, data,and capabilities.Weakness is an inherent limitation or constraint whichcreates strategic disadvantages. Examples of weaknessare: gaps in capabilities financial deadlines low moraleare: gaps in capabilities, financial deadlines, low morale,and overdependence on a single product line.

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External environmentThe external environment includes all theThe external environment includes all thefactors outside the organisation which provideopportunities or pose threats to theorganisation.gOpportunity is a favourable condition in the organisation'senvironment which enables it to consolidate and strengthenits position. Examples of opportunity are: economic boom,favourable demographic shifts, arrival of new technologies,l i f l ti f bl l b l i fl dloosening of regulations, favourable global influences, andunfulfilled customer needs.Threat is an unfavourable condition in the organisation'senvironment which creates a risk for, or causes damage to,the organisation Examples of threat are: economic downturnthe organisation. Examples of threat are: economic downturn,demographic shifts, new competitors, unexpected shifts inconsumer tastes, demanding new regulations, unfavourablepolitical or legislative, new technology, and loss of key staff.

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Technique of SWOT analysisSetting the objectives of the organization or its unitSetting the objectives of the organization or its unitIdentifying strengths, weaknesses, opportunities, and threatsAsking four questions Asking four questions

How do we maximise our strengths?How do we minimise our weaknesses?How do we capitalise on the opportunities in our How do we capitalise on the opportunities in our external environment?How do we protect ourselves from threats in our external environment?external environment?

Recommending strategies that will optimise theanswers from the four questions

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Benefits of SWOT analysis

Si l tSimple to useLow costFlexible and can be adapted to varying situationsLeads to clarification of issueDevelopment of goal alternativesp gUseful as a starting point for strategic analysis

The business environment of an organisation

GENERAL ENVIRONMENT

ORGANIZATION

GENERAL ENVIRONMENT

RELEVANT ENVIRONMENT

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Eight sectors of the business environment

EconomicEconomicInternationalMarketMarketPoliticalR l tRegulatorySocio-culturalS liSupplierTechnological

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Economic EnvironmentThe economic environment consists of macro level factors relatedThe economic environment consists of macro level factors relatedto means of production and distribution of wealth that have onbusiness of organization

Some important factors arep1. Economic stage in which country exists2. Economic structure adopted like Capitalistic, socialistic or

mixed economyy3. Economic policies such as industrial monetary and fiscal

policies4. Economic planning such as five year plan, annual budget etcp g y p , g5. Infrastructural factors such as banks, mode of transportation etc

International EnvironmentThe international environment consists of all those factorsThe international environment consists of all those factorsthat operate at transnational, cross cultural and acrossborder level, having impact on business of organization e.g.

1. Globalization, its process, content and direction2. Global economic forces, block and forum3. Global trade and commerce, its process and trend4. Global financial system, sources of financing5 Geopolitical situation equation alliances and strategic5. Geopolitical situation, equation, alliances and strategic

interests of nations

Market Environment The market environment consist of factorsThe market environment consist of factorsrelated to group and other organization thatcompete with and have an impact on anorganizations marketSome factors are as below

1 Customer or client factors such as need 1. Customer or client factors such as need, preference

2. Product factors such as demand , image , g3. Marketing intermediary factors like delivery

systems

Political EnvironmentThe political environment consist of factorsThe political environment consist of factorsrelated to management of public affairs andimpact on business organization

1. The political system and its features likenature of political system

2 The political structure its goals and stability2. The political structure, its goals and stability3. Political processes like operation of party

system, electionsy ,4. Political philosophy, govt role in business etc

Regulatory environmentThe regulatory environment consists of factorsThe regulatory environment consists of factorsrelated to planning, promotion and regulationof economic activities

1. The constitutional framework , directiveprinciples

2 Policies related to licensing monopolies and2. Policies related to licensing, monopolies andforeign investment

3. Policies related to distribution and pricing andp gcontrol

4. Policies related to import and exports

Socio Cultural environmentTh i lt l i t i tThe socio cultural environment consistsof factor related to human relationshipwithin society the development formswithin society, the development, formsand function of such relationship andlearned and shared behavior of groupslearned and shared behavior of groupsof human being having a bearing inbusiness of organizationbusiness of organization

Some of important factors and influencesSome of important factors and influencesoperating in social environment

1. Demographic characteristics like population,g p p p ,density

2. Socio cultural attitudes and values such asexpectation of society from business socialexpectation of society from business, socialcustom

3. Family structure and changes in ity g4. Role and position of men, women, children and

aged in family and society

Supplier environmentThe supplier environment consists of factors related toThe supplier environment consists of factors related tocost, reliability and availability of factors of production orservices that have impact on business of an organizationSome important factors areSome important factors are

1. Cost availability and continuity of supply of raw material2. Cost availability of finance3. Cost , reliability and availability of energy used in

production4. Cost ,availability and dependability of human resource

Technological EnvironmentTechnological EnvironmentThe technological environment consist of thoseThe technological environment consist of thosefactors related to knowledge applied and materialand machines used in production of goods andservices that have impact on business of an

i tiorganizationSome important factors are

1. Sources of technology like company source , l d f i external sources and foreign sources

2. Technological development, stages of development change and rate of change of technologytechnology

3. Communication and infrastructural technology in management

Environmental scanning Environmental scanning

E i t l i b d fi dEnvironmental scanning can be definedas process by which organizationsmonitor their relevant environment tomonitor their relevant environment toidentify opportunities and threatsaffecting their business for purpose ofaffecting their business for purpose oftaking strategic decisions

Factors in environmental scanningEvents are important and specificEvents are important and specificoccurrences taking place in differentenvironmental sectors.Trends are the general tendencies or thecourses of action along which events takeplace.place.Issues are the current concerns that arisein response to events and trends.Expectations are the demands made byinterested groups in the light of theirconcern for issues.

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concern for issues.

Approaches to Environmental scanning

Kubr has suggested three approaches which could beadopted for sorting out information for environmentalscanning

These three approaches are

Systematic approaches

Ad hoc approach

Processed-form approach

Systematic ApproachUnder this approach information forUnder this approach, information forenvironmental scanning is collectedsystematically. Information related to marketsand customers, changes in legislation andregulations that have a direct impact onorganizations activities etc. It could be collectedorganizations activities etc. It could be collectedcontinuously to monitor changes and take therelevant factors into account. Continuouslyupdating such information is necessary not onlyupdating such information is necessary not onlyfor strategic management but also for operationalactivities

Adhoc Approach U i thi h i tiUsing this approach an organizationmay conduct special service and studiesto deal with specific environmentalto deal with specific environmentalissues from time to time. Such studiesmay be conducted for instance when anmay be conducted for instance when anorganization has to undertake specialproject, evaluate existing strategies orproject, evaluate existing strategies ordevise new strategies.

Processed-Form ApproachFor adopting this approach theFor adopting this approach theorganization uses information in processedform available from different sources bothform, available from different sources bothinside and outside the organization. Whenan organization uses information suppliedg ppby Govt. agencies or private institutions, ituses secondary source of data and thei f ti i il bl i d finformation is available in processed form.

Sources of information for environmental scanning

D t d Documentary or secondary sourcesMass mediaInternal sourcesExternal agenciesFormal studiesSpying and surveillanceSpying and surveillance

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Factors affecting environmental appraisal

St t i t l t d f t Strategist-related factors Organisation-related factors Environment-related factors

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Identifying high priority environmental issues

Impact on Business __________________________________________________________

Probability High Medium Low fof impact

----------------------------------------------------------------------------------High Critical High priority Low priority

Medium High priority High priority Low priority Medium High priority High priority Low priority

Low To be watched Low priority Low priority ---------------------------------------------------------------

Source: Adapted from the William R.Boulton: Business Policy: The Art of Strategic Management (New York: Macmillan Publishing Co., 1984) p.120.

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g ( g , ) p

Environmental threats and opportunities profile (ETOP)

Environmental Nature of impact Impact of each sectorSectors

EconomicInternationalMarketPoliticalRegulatorySocio-culturalSupplierSupplierTechnological

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