Strategic Management :Unit II

Environmental Scanning
Industry Analysis
Competitive Intelligence
ETOP Study, OCP, SAP Scanning,
Corporate Analysis,
Resource based approach,
Value-Chain Approach
Scanning Functional Resources,
Strategic Budget and Audit

The role of environment and its components are very important for business firm as all the
objectives and goals of the firm lie in the environment. The success and achievements of the
firm are the outcomes of its interactions with the environment. Better the interactions better
the results and performance of the firm and vice-versa. Better interactions needs better
understanding of environment so that internal capabilities are perfectly matched with external
opportunities and threats. The major challenge of environment to a business firm is its
dynamism.

Environmental Scanning: The study of all components of external environment is termed as

environmental scanning. Through scanning a firm can be aware of:
1. Early signals of potential changes.
2. Changes which are already going on.
3. Strategies of Competitors.
4. Counter strategies to be adopted.

Strategy is a game plan for action i.e. the way of doing something.
It usually includes the formulation of Goal and set of Action plans for
achievement of goal under competitive environment and against competitive
forces Strategy is the firm’s response and pattern of responses towards
outside forces. The organizational goals as stated during planning stage are to
be achieved under threats and opportunities conditions created by outside
forces.

Emergent Strategies

Planning Intended Ways Goal

Counter Strategies

The concept of strategy has its roots in military and armed forced. The
actions and reactions of the outside forces are the heart of modern approach
of strategy. Under competitive environment wherever the plans are
implemented they are countered by these forces. The actions / reactions of
the outside forces generate emergent strategies of the organization and
followed by counter strategies on a continuous basis like a chain reactions.
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Competitive and market analysis is also important part of strategy
formulation. A successful analysis of competitive and market analysis help
organization to develop its own “Sustainable Competitive Advantage” which
prove to be a “Distinctive Competence” (DC) or uniqueness over
competitors and market. Once the above objectives / steps are completed the
role of H.R. began to acquire and develop the personnel of organization to
achieve the D.C. through integrative efforts of different departments.
Examining and Dealing with Environments for Strategic HRM:
Although, the future is not perfectly predictable, but a close watch over the
environmental forces and responding well a organization can visualize “most probable”
outcomes. A HR manager who is fail to visualize the opportunities and threats
created by marketing environment is said to be ineffective. Thus, obtaining
information, having a close watch over external forces and responding well is the basic
purpose of this chapter / topic. Environmental Monitoring Scanning and Analysis
are best tools to respond and key success parameters.
Environmental Scanning is the process of collecting informations about
the forces in the marketing environment, scanning involves observation, perusal of
secondary source of dates (Business, Trade and Government) and research efforts.
Environmental Analysis is the process of assessing and interpreting the informations
gathered through scanning. This help to predict future and create strategies. The
potential threats and potential opportunities can be visualized through Environmental
Scanning and Analysis.
Responding to Environmental Forces: An Strategic Approach:
There are two general approaches to respond environmental forces:
1. View Environmental Forces as totally uncontrollable and difficult to
predict:
Here, the organization adopts a passive and reactive approach to
respond i.e. organization does not try to influence the different forces but try
to adjust the affect of forces.
2. View Environmental forces as challenges and taking aggressive
stands i.e. reactive and proactive approach:
HR manager can use the porter model of 5 forces to evaluate the outside
forces which may guide HR department for creating HR strategies.
Threats of
Potential
Entrants

Bargaining Industry Bargaining

Power of Environment Power of
Suppliers s Customers

Threats of
Substitute
Products /
Services

Industry Analysis: A particular industry is said to be a market where various firms are
pursuing their strategies to compete with similar offerings and enjoying their own market

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share, product acceptability, competitive position, brand loyalties, and profitability are the
results of their strategies and competitors strategies.. A continuous watch over the market is
must to grow, sustain, and survive in the dynamic environment. There are two basic aims
behind strategic industry analysis:
1. Analysis of relevant industry, its components, degree and nature of
competitiveness i.e. opportunities & threats.
2. Analysis of available internal resources, competencies, strengths and weakness.

Strengths

Opportunities Threats

Weakness

The environments of industry to industry is quit different. A firm operating in a particular

industry generally has following environment components:

Micro Environment
OR
Firm Immediate Environment

Mega Environment

1. The Mega Environment: Consists of following:

- Demographic
- Political
- Legal
- Social
- Cultural
- Economic

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2. The Micro Environment or Immediate Environment: There is a very thin line
difference between the firm and its micro environment. Within micro environment there may
be different industries consisting of various competitors.
For Exp: Within cement industry there are various competing firm, the immediate or micro
environment of cement industry may consists of firms’ manufacturing and marketing steel,
iron bricks, etc. If a firm of cement industry lower down its prices the iron and steel industry
will automatically be affected likewise the micro environment of Tea industry is coffee and
sugar industry.

.
Threats of
Potential
Entrants

Bargaining Industry Bargaining

Power of Environment Power of
Suppliers s Customers

Threats of
Substitute
Products /
Services

3. The Technological Environment: Within any industry or society there are direct
and indirect interactions involved in developing new things, new ideology,
innovations, research & development, new process, new or substitute products ,
cheaper substitute of raw materials more ever the Govt. Policies and MNC’s
always bring new technology and better concepts to produce and market
products/services. The rise of new technologies , new industries emerged which
consumes the purchasing power of customers such as Biotech, genomics, voice
recognition software, Biodegradable plastics, genetics and internet.

The Competitive Environment of an Industry refers to the various external forces which
make a particular Industry – Attractive or Unattractive. Industry Attractiveness refers to
Profit Potentials and Growth Potential. The most common tool to analyze the Industry is
Porter’s 5 Forces Model.

Strategic Groups and Industry Environment:

Under intense competition a firm must choose unique pattern of its functions related to
marketing, pricing, product attributes & positioning, segmentation and other strategies.
Under competition firm’s own behavior must be different from its rivals.

Within a industry there are various segments of customers by virtue of their purchasing
power, preferences, consumption pattern etc. On the basis of aggregate consumer behavior
within a particular industry we can group the entire customers into different parts. For Exp.
For a car industry 60% customers are price sensitive, 15% are status conscious, 5% choose
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the most luxury car with multiple comforts. On the basis of above classification firms of the
industry design their products and other Ps strategically to suit and match the requirements of
a particular customer class.

Implications of Strategic Groups within Industry

Analysis of Strategic Group within an industry provides useful informations as under:

1. There are different strategic groups within an industry and the firms presuming same
strategies are comparatively close and facing intense competition.
2. Members of one strategic group pose high challenges and threats to each other and
hence their decisions and strategies are not independent.
3. There are chances of price war between members of one strategic group.
4. Members of different strategic groups are not directly affected by each other and
hence their decisions and strategies are independent.
5. A very strong brand and customer loyalties of a particular firm creates a very high
entry barrier to the members of other strategic group.
6. There is a strong impact of environment on different strategic groups and sometime
only a few firm or groups are influenced by environmental changes.
7. The position of firms within a group is dynamic and likely to change due to
environmental change, or strategies of other firms.

Industry Analysis:

SWOT Analysis (Strength, Weakness, Opportunities and Threats Profile)

As the firm operates under dynamic environment and strategic fit of internal strengths and
weaknesses with external opportunities and threats is a must and a matter of constant and
regular exercise of the firm. Without this a firm can not be able to create a perfect match of
its capabilities with external demands. The approach to match internal capabilities with
environmental opportunities and threats are known as SWOT analysis. The basic aim of
SWOT is to provide an insight to the managers the abilities of the firm (Strength and
Weakness) in terms of handling opportunities and threats. The SWOT provides a framework
within which a firm can develop and alter its strategies and shape the actions of functional
and other levels of firms.

Internal analysis reveals the strength and weaknesses of the organization in term of its
internal capabilities, competencies, efficiencies, financial position, track record, experience.

Strengths: are resources, skills or other advantages relative to competitors. Strength is a DC

that gives a firm comparative advantage in the market and competition.
For Exp. Financial Resources, image, market leadership etc.
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Weaknesses: limitations or deficiencies in resources, skills and capabilities of the firm that
seriously affect the firm’s performance under competition i.e. Disadvantages.

Opportunities: Major favorable situations in the firm’s environments. Opportunities may

occur due to poor performance of competitors, consumer demand shift, government policies,
unique raw materials, technological changes, better buyer-supplier relationships etc.

Threats: major unfavorable situations in the firm’s environment which may affect firm’s
current and potentials performance. A particular threat may be an opportunity for competitor
and vice versa.

Strategic Management Process:

Analysis of Internal Environment for Strength and Weakness

External Environment for Opportunities and Threats
Formulation and Vision, Mission The ultimate goals
Statement of Objective Market to Compete
Strategies & Competencies to develop
Policies and major Actions
Implementation of best fit organization structure, resources, culture and operation
control.
Evaluation & Developing counter strategies if necessary.
Control

Effectiveness of HR, level of commitments, loyalties (all quantitative and qualitative) to

compete with the rival firms within industry are counted as Strength. Firm’s weaknesses are
internal deficiencies in term of above. The deficiencies are regarded as organizational
constraints and disadvantages to compete and fight with rival firms. When a firm analyzes its
internal capabilities as stated above the process is known as SAP (Strategic Advantage
Profile).

On the other hand , analysis of external environment to find out opportunities and threats are
known as ETOP Analysis (Environmental Threats and Opportunities Profile). Thus we
can say SWOT is a function of SAP & ETOP.

Implications of SWOT Analysis:

1. SWOT provides the basis for exploiting the opportunities out of its internal strengths
and capabilities. These Strategies are called as Exploitative or Developmental
Strategies.
2. Environmental– Threats and their impacts can be minimize through minimum
exposures of weaknesses – these strategies are called Blocking strategies.
3. If firm is able to recover and repair its weaknesses –these strategies are called as
Remedial Strategies.

STRENGTHS OPPORTUNITIES

Firm 6
- Clear vision & Mission - Increasing Income
- Better Financial Position - Better Education
- Better Track Record - Developed Society
- State of Art Technology - Govt. Support
-Better Network for Marketing - Absence of Strong
Competitors
- Un-served Market
Segmentation

WEAKNESSES THREATS

- Poor Selling & Marketing Team - Potential Rivalry

- Poor Strategies - High Rate of Tech.
- Weak Customer Services in Future
- Poor Understanding with channel members - MNCs Threats due
to Policies of
Govt.

Fig:SWOT Model

4. Cost Efficiencies Strength of a firm can be used to increase market share through
appropriate pricing strategy.
5. Firm’s internal and external situations and its strategic match can put the firm in a
unique position in market.
6. As stated above SWOT provides a strategic framework to firm within which it can
plan to compete in market. As shown in the figure below, there are 4 cells –
representing respective strategies.

Various Opportunities

CELL – 3 CELL – 1

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 Turnaround Aggressive Growth Oriented
Strategy Strategy i.e. Offensive Strategies

Comparative Internal Substantial

Weakness Strength
CELL – 4 CELL – 2

Defensive Diversification & Defensive

Strategies Strategies

Major Environmental Threats

CELL – 1: Represent most favorable situation with various opportunities and firms internal
Strengths. Under these situations a firm can choose aggressive growth oriented strategies.

CELL – 2: Shows the mixed situation with substantial internal strengths to face major
environmental threats. Firm’s strength can be used to exploit long term opportunities and to
cop with threats.

CELL – 3: Various opportunities are there but the firm is unable to cash due to its internal
weaknesses.

CELL – 4: is just opposite to the cell -1 i.e. most unfavorable situation under these
condition withdrawal or reduced operations is suggested in product market.

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SAP Analysis:

Internal assessment of the firm is critical for developing successful business and better
strategies. Internal analysis began with the identification of organization’s resources
allocations. Resources allocation convert financial resources into organizational, Human and
Physical resources and ultimately into the ability to interact and compete in the market.
Successful market interaction generates great financial resources which are again converted
into Human and other Physical resources with greater abilities to fight in the market. This is
like a chain reaction of firm’s internal resources to generate and re-generates greater amount
of financial, physical, Human (tangible resources) and better capabilities to compete in the
market with added strength as show in the figure below.

SAP is the process by which firm’s resources and capabilities of key functional areas are
examined to determine its strengths and weaknesses.

The key functional areas may be:

1. Organization Itself
- Culture
- Form and Structure
- Top Management Skills & Interests
- Planning System
2. Personnel (HR)
Or Human Capital
- Attitude
- Skills
- Competencies
- Loyalties
- Perceptions

Organization’s
H.R.
Resources

Firm’s Reallocation
Financial Greater and Greater
Resources Financial Capabilities to
Resources compete i.e.
STRENGTH

Organization’s
Physical
Resources

Internal Analysis for SAP and Resources Conversion Process

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 3. Marketing
- Size of the Sales Force
- Product Quality
- Image
- Product Line
- Customer Services
4. Technical
- Production Facilities
- Production Techniques
- Product Development abilities/skills
-R&D
5. Finance
- Financial Strength
- Potential Financial Strength
- Revenue Potentials

By analyzing the above a firm is in a position to decide its “Competitive Advantages” and
“Distinctive Competencies (DC or Uniqueness) over competitors in the market. Internal
analysis consists of examining “Qualitative and Quantitative” resources viewing all
available resources in term of “Tangible Resources” and “Intangible Resources”.

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 Steps in Developing Firm’s SAP

Identification of Strategic internal

Step – 1 factors and value activities

How do these activities and factors

fit with current conditions and
Step – 2 firm’s past history of performance?

Favorable Unfavorable

Strength Weakness

How do these Strength & Weakness

can be utilize to compete in market

Step – 3

How do these Strength & Weakness

compare with capabilities and
resources of main competitors?

Provide an edge Necessary Skills/ Necessary Skills

Over competitors other Requirements and other require-
ments are not
possible

Competitive Basic Business Competitive

Advantages Requirements Disadvantages

Necessary inputs available for

strategy formulation Step 4 11
 The Value Chain Approach:

The value chain approach to diagnose firm’s key strengths and weakness was
developed by Michael Porter. Value chain is an excellent framework by which a firm can
determine its strengths and weaknesses through parts of its operations that create value and
those do not. A firm can earn above-average return only when the value it creates is greater
than the costs incurred to create that value. The value chain analysis is a systematic way to
analyze the series of activities a firm perform to provide a product to its customers. The value
chain disaggregates a firm into its activities in order to understand the behavior of the firm
cost and its existing or potential source of differentiation (competitive edge over
competitors). The disaggregated activities are called as “Key internal factors” – more cheaper
or better than its competitors. As shown in the figure the firm value chain is divided into two
types of activities.
1. Primary Activities:

These activities are involved in products physical creation, its sales and distribution to
customers, marketing, and after sales support.

2. Support Activities:

Which provide inputs, infrastructure and assistance to primary activities to take place.

SUPPORTIVE ACTIVITIES

Firm Infrastructure
H.R. Management
Technological Development Margin
Procurement
Marketing Activities
Out bound Logistics

After Sales Services

Inbound Logistics

Margin
Operations

PRIMARY ACTIVITIES

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The value chain shows how the raw materials are converted into final products and marketed.
It is vary apparent that human skills, knowledge and willingness in involved at every part of
the chain.

Using value chain analysis a firm can identify its strengths in terms of “ Core Competencies”,
Key Result Areas (KRAs), and DCs.

The term margin which covers both primary activities and supportive activities in the figure
denotes how an organization is capable to generate profit margin with the linkage of both the
activities.

Resource Based Approach of Internal Analysis

(Care: Before Value Chain)

Success of a business firm heavily depend how well firm have a set of DC and resources
which are significantly different from those of its competitors. For a successful corporate
strategy a firm has to identify resources that systematically distinguished the firm in a way
that no other competitor can easily imitate or duplicate (assets, skills, technologies,
capabilities etc.). The resources based approach to analyze firm’s suggest that the available
resources must be unique in term of:
1) Quantity, quality, durability
2) Not easy to imitate or duplicate
3) Highly specialized and durable (such as
brand name and patent)

Such a unique mix of resources provides long term sustainability and competitive edge over
its competitors. Following figure shows the Resources Competencies Framework which
enables a firm to show its strategic capabilities and competencies over competitors.

Easy to Imitate Difficult to Imitate

Necessary Unique
Competencies Resources

Resources Resources

Threshold Core
Competencies Competencies

Same as Competitors Better than Competitors

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Value chain analysis is one of the best resource based internal analysis tool.

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ETOP Analysis:

A profile of environmental threats and opportunities is considered to be a very useful device

and is a summarized depiction of environmental factors and their impact on future functions
of firm under competitive environment. The environment is a significant source of change
and is highly dynamic in nature. Some organizations become victim of the change and
dynamism of environment.

Basic Characteristics of Environment:

1. Uniqueness
2. Dynamic in Nature
3. Variability of Control
4. Environment Carries Risk, Uncertainties and Opportunities

On the basis of impact on a business house we can divide the environment into 4 categories:

1. The Mega Environment or Broader Environment:

a) Demographic Factors
b) Political Factors
c) Legal & Regularity
d) Socio-Cultural
e) Economic

2. The Micro or Immediate Environment or Industry Environment:

This environment and its components are very close to the firm; in fact the firm operates
within this environment. Therefore, the intensity of negative or positive effects are directly
hit the firm and its strategies/decision making. Porter Model of 5 Forces is the best tool to
evaluate this environment.

Porter’s 5 Forces Effects on Industry Profitability and Functioning

High Rivalry Low Profitability

High Power of Suppliers Low Profitability

Low Power of Buyers High Profitability

Threats of Potential Rival- High Low Profitability in

Future and Unattractive
Industry

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 Threats of Substitutes Low Profitability

3. The Technological Environment:

Cut & paste from unit I

4. Global Environment

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