ENVIRONMENTAL SCANNING

Definition

The process by which strategists monitor the economic, governmental/legal, market/competitive, supplier/technological, geographic and social settings to determine opportunities and threats to their firms
Environmental Scanning consists of managerial decisions made by analysing the significance of data (opportunities and threats) of the environmental analysis

Environmental Scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the corporation.

A corporation uses this tool to avoid strategic surprise and to ensure its long-term health.

TYPES OF ENVIRONMENT
1)
2)

INTERNAL ENVIRONMENT EXTERNAL ENVIRONMENT

BUSINESS DECISION EXTERNAL FACTORS

INTERNAL FACTORS

INTERNAL ENVIRONMENT
Important internal factors are 1) Value System

The value system of founders and those at the helm of affairs has important bearing on the choice of business, the mission and objectives of the organization, business policies and practices.

2) 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

INTERNAL ENVIRONMENT
3) Management Structure and Nature The organizational structure, the composition of the Board of Directors, extent of professionalization of management etc. are important factors influencing business decisions. 4) Internal Power Relationship Factors like the amount of support the top management enjoys from lower levels and workers, share holders and Board of Directors have important influence on the decisions and their implementation. The relationship between the members of Board of Directors is also a critical factor.

INTERNAL ENVIRONMENT
5) Human Resources The characteristics of the human resources like skill, quality, morale, commitment, attitudes etc. could contribute to the strength and weakness of the organization. The involvement, initiative etc. of the people at different levels may vary from organization to organization. 6) Company Image and Brand Equity The image of the company matters while raising finance, forming joint ventures or other alliances, soliciting market intermediaries, entering purchase or sale contracts , launching new products etc.

INTERNAL ENVIRONMENT
OTHER FACTORS
1. 2. 3. 4.

Physical Assets and Facilities R&D and Technological Capabilities Marketing Resources Financial Factors

EXTERNAL ENVIRONMENT
Two Types a) Micro Environment

Consists of actors in the companys immediate environment, that affects the performance of the company. Consists of larger societal forces that affect all the actors in companys micro environment.

b)

Macro Environment

MICROENVIRONMENT

Also known as task environment and operating environment Include

The suppliers Marketing intermediaries Competitors Customers Publics

More intimately linked with the company than macro factors The micro forces need not necessarily affect all the firms in a particular industry in the same way. Some of the micro factors are particular to a firm

suppliers

Those who supply the inputs to the company. Source/Sources should be Reliable Uncertainty regarding the supply or other supply constraints compel companies to maintain high inventories causing cost increases. Very risky to depend on a single supplier The purchasing department should market itself to suppliers, to obtain favourable treatment during the periods of shortages.

Major task of business is to create and sustain customers Different categories of consumers
Individuals Households Industries and other commercial establishments Government and other institutions

customers

Depending on single customer is too risky Choice of customer should be done by considering
Relative profitability dependability stability of demand growth prospectus extent of competition

A firms competitors include not only the other firms which market the same or similar product but also all those who compete for the income of the consumers
Desire competition Generic competition Product form competition Brand competition

competitors

Marketing intermediaries

Firms that aid the company in promoting, selling and distributing its goods to final buyers. Include

Vital links between the company and the final consumers.

the middlemen and merchants who help the company find customers or close sales with them Physical distribution firms which assist the company in stocking and moving goods from their origin to their destinations Marketing service agencies which assist the company in targeting and promoting its products to the right markets Financial intermediaries which finance marketing activities and insure business risks

publics

Any group that has an actual or potential interest in or impact on an organizations ability to achieve its interests
Media attack on any company can influence the government decisions affecting the company. Environmental pollution is an issue often taken up by number of local publics Publics are not always threat to the business. Fruitful cooperation between a company and the local publics may be established for the mutual benefit.
E.g. Media publics, citizens action publics, local publics

MACRO ENVIRONMENT
Consists of larger societal forces that affect all the actors in companys micro environment-namely

Also known as Societal Environment The Societal Environment includes general forces that do not directly touch on short-run activities of the organization but that can, and often do, influence its long-run decisions.

the demographic, economic, natural, technological, political and cultural forces

Economic Environment

Important factors are:

Economic conditions Economic policies Economic systems

Economic condition

1. The economic conditions of a country for example, the nature of the economy, 2. the stage of development of the economy, 3. economic resources, 4. the level of income, 5. the distribution of income and assets, etc.are among the very important determinants of business strategies.
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Economic Environment
Economic policies

Some types or categories of business are favourably affected by government policy, some adversely affected, while it is neutral to some others. E.g. a restrictive import policy may greatly help the import competing industries, while a liberalisation of the import policy may create difficulties for such industries

Economic System

The scope of the private business depends on the economic system. The freedom of the private enterprise is the greatest in the free market economy.

Political & Government Environment

Has close relationship with the economic system and economic policy. In many countries regulations to protect consumer interests have become stronger. Some governments specify certain standards for the products to be marketed in the country; some even prohibit the marketing of certain products. Promotional activities are subject to various types of controls. Eg: In India, Advertisement of alcoholic product is prohibited. and the packages must carry injurious to health warnings

socio-cultural environment

Major factors are:

Strategy should be appropriate in the sociocultural environment.

the buying and consumption habits of people, their language beliefs and values, customs and traditions, tastes and preferences, Education

Eg: nestle brews a very large variety of instant coffee to satisfy different national tastes

Even when people of different cultures use the same product; the mod of consumption, conditions of use, purpose of use or the perceptions of the product attributes may vary so much so that the product attributes, method of presentation, positioning or method of promoting the product may have to be varied to suit the characteristics of different markets.
E.g.: Vicks Vaporub, the popular pain balm is used as mosquito repellent in some tropical countries

Demographic environment

Factors: Size, growth rate, age composition, sex composition of population, family size, educational levels, economic stratification of the population, language, caste, religion, etc. E.g. Decline in birth rates in USA have affected the demand for baby products. So Johnson &Johnson repositioned their products like baby shampoo and baby oil, to the adult segment, particularly to females.

Natural environment

Geological and ecological factors, such as natural resources endowments, weather and climatic conditions, topographical factors, location aspects in the global context, port facilities etc., are relevant to business. Differences in geographical conditions between markets may some times call for changes in the marketing mix. Geographical and Ecological factors also influence the location of certain industries. E.g. industries with high material index tend to be located near the raw material sources.

Physical & technological environment

Business prospects demands availability of certain physical facilities

E.g. demand for electrical appliances is affected by the extent of electrification and the reliability of power supply. Demand for LPG stoves depend on rate of growth of gas connections E.g. Many appliances are designed for 110 V in USA. They should be converted for 240v in India

differing technological environment of different markets may call for product modifications Technological developments may increase or decrease the demand for some existing products
E.g. voltage stabilizers help increase in sale of electrical appliances in markets characterised by frequent voltage fluctuations Introduction of TVs, Refrigerators, etc. with in-built stabilizers adversely affects the demand for voltage stabilizers.

International Environment

Particularly important for the industries directly depending on imports or exports and import-competing industries Recession, economic boom, liberalization Major international developments have their spread effects on domestic business.
E.g. Oil price hikes increased the cost of production and the prices of certain products such as fertilizers , synthetic fibres. So usually, the demand for natural fibres and manures increased. Also demand for automobiles that economise energy consumption got increased.

STAGES OF ENVIRONMENTAL ANALYSIS

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Identifying environmental factors

First of all a strategist should identify all the relevant factors that might affect his or her business.
In this process, one should first know what the internal areas of the business are. This includes all the systems, internal structure, strategies followed, and culture of the organization. All these areas can be covered into the five functional areas in classical approach.

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Similarly, a business daily interacts with the close environmental components outside the business such as customer, competitor, and supplier. It might cover all other stakeholders such as trade union, media, and pressure group. Furthermore , general such business environment factors as political-legal, economic, sociocultural, and technological factors are to be identified

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SCANNING

General Surveillance of Environmental factors. It is useful to Identify early signals Detects changes

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Monitoring

Tracking Environmental Trends , events , activities that occurs in the form of signals during the process of scanning

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Analysis of Variables

Selected environmental factors are to be further specified into the variables. A concept can be interpreted into different variables. For example, Political situation can be measured using few variables such as instability, reliability, and long-term effect. Economic environment might cover many variables such as Per Capita, GDP, and Economic policies that can be further classified into many other variables. Variables are the basis of measurement in environmental analysis process.

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Environmental Forecasting
Concerned with future events, on basis of which further course of action is devised. It analyses past & present relevant events & experiences.

Economic Forecast: Economic factors are quite important in determining the business prospects. These include General Economic conditions, GDP Growth rate, Per Capita Income, Saving, Investment, Investment & Output trends in different sectors & Sub Sectors/ Industries, Trade & Balance of Payments. Social Forecast: Social factors determine the level of business. Demographic trends, housing, health, household income, expenditure pattern, government policy , Social barriers, rural urban mix, gender ration etc affect the quality of social forecast.
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Political Forecast: Domestic as well as foreign political developments have got great impact on business decisions. Changes in relative power of political parties, Change in relative power structure, Political alliance, Political ideologies, Level of cooperation & Political view of business. Technological Forecast: This is concerned with creativity & Innovations. Pace & Extent of diffusion & Penetration of technologies play a important role.

Techniques of Environmental Forecasting

A)
1)

Quantitative Methods Time Series: It identifies patterns in historical data & predict how these are likely to recur in future period. It assumes that a historical pattern or combination of pattern will repeat over time, so the managers can predict the future trends.

Trend: Steady upward & downward movement in a pattern of movement taking place over an extended period. Seasonal: Reflects fluctuation in data that occur periodically coinciding to a particular time or season. Cyclical: Fluctuations that occur a period longer than one year. Random Pattern: Fluctuations due to Political Crisis, Strikes & other unpredictable events.
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2)Casual Models-To forecast the behaviour of Dependent variables,with the help of independent variable. Regression analysis Econometric Model Leading indicators

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B) Quantitative Forecasting Techniques Delphi Techniques Technological Forecasting Multi-criteria analysis

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FIVE FORCES MODEL - PORTER

Threat of New Entrants

Bargaining power of Suppliers

Competition from Existing Players

Bargaining Bargaining power of power of Suppliers Customers

Threat of Substitutes
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PORTERS FIVE FORCES ANALYSIS

Competition from existing players Industry growth rate, attractive margins. Intermittent overcapacity. Strong product differentiation. Fragmented market. High exit barriers. Concentrated market. Unorganised sector. Piracy and counterfeits. Dependence on advertising and promotion.

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PORTERS FIVE FORCES ANALYSIS

Threat of New Entrants Economies of size and scale. Huge investment in CAPEX. Strong brand power. Product differentiation. Resource profile, access to inputs. Learning curve advantages. Access to distribution channels. High switching costs. Licensing & Quotas.

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PORTERS FIVE FORCES ANALYSIS

Bargaining power of Customers Buyer concentration and volumes. Scope for backward integration. Price sensitiveness = Price / Total Purchase. Customer age profile, individual - corporate. One-time / repeat purchase . Decision makers incentive. Business margins. Credit limits.
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PORTERS FIVE FORCES ANALYSIS

Bargaining power of Suppliers Importance of volume to supplier. Presence of substitute inputs. Differentiation of inputs. Low scope for vertical integration Threat of Substitutes Source of latent competition timing. Substitute offering a price advantage and/or performance improvement. Buyers propensity to substitute.

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Designing Profile

After analyzing the environmental factors they are recorded into the profiles. Such profiles record each component or variables into left side and their positive, negative, or neutral indicators including their statement in the right side. Internal areas are recorded in Strategic Advantages Profile (SAP) and external areas are recorded in Environmental Threat and Opportunity Profile (ETOP). Strength, Weakness, Opportunity, and Threat (SWOT) profile can be designed combining both of these two profiles into one.
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STRATEGIC ADVANTAGE PROFILE (SAP)

Organisations have to systematically and continuously conduct exercises to identify its SAP. In most cases SAP is hidden. Identification of SAP is critical for and stretching and leveraging of resources. In today's world of discontinuity, SAP changes from time to time. Most successful organisations around the world have a well balanced SAP.
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COMPOSITION OF SAP

Marketing High market standing and steady market share. Continuous product innovation. Strong market penetration. Market Research early trend recognition. Advertising effectiveness. Cost leadership. Finance Low cost of capital. Dynamism in tax planning. Innovative financial instruments. 47

COMPOSITION OF SAP
Human Resources Low attrition rate. Ability to attract talent. Research & Development Large no. of patents. Huge spending in R&D. Velocity of R&D multiplier. Production Flexible manufacturing systems. Outsourcing and controlling SCM.

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ETOP
Acronym for Environment Threat Opportunity Profile. It represents a summary picture of the environmental factors and their likely impact on the organisation. Stages in ETOP analysis List the different aspects of the environment that has a bearing on the organisation. Assess the nature and extent of impact of the factors. Holistic view Prepare a complete overall picture. Forecasting Predict the future (i.e. multi-variate, delphi's technique, judge-mental). 49

SWOT Analysis

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SOURCES OF STRENGTH
Strong brand identity Eg. Tata. High quality products Eg. Sony, Toyota. Excellent penetration Eg. HLL, ITC. Strong R&D base Eg. Dr. Reddys, Ranbaxy. Economies of scale Eg. Reliance. Good credit rating Eg. Infosys. Motivated employees & cordial industrial relations Eg. Tisco. Large resource pool Eg. Reliance. Strong after sales & service network Eg. Caterpillar. 51

SOURCES OF WEAKNESSES
Outdated technology Eg. Hindustan Motors. Poor working capital management Eg. Kirloskars. Excess manpower Eg. SAIL. Narrow product base Eg. Procter & Gamble. Inefficient top management Eg. Ballarpur Inds. Single product base Eg. Nirma.

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SOURCES OF OPPORTUNITIES
Delicensing of Industries Eg. Telecom. Import relaxations Eg. Hardware & Software. Capital market reforms Eg. Abolishing CCI. Abolishing MRTP Eg. Maruti. Consumerism Eg. Retailing. Growing population Eg. Middle-class buying power. Globalisation Eg. GDRs, ECBs Free pricing Eg. Fertilisers, Insurance, Sugar Exit Policy Eg. VRS Collaborations & Joint Ventures Bharti WalMart. 53

SOURCES OF THREATS
Political instability Eg. (19851990). Social activism Eg. Singur SEZ. Terrorist attacks Eg. 9/11. Import liberalisation Eg. Dumping from China. Foreign Direct Investment (FDI) Eg. Onida. Economic recession Eg. (1970s). Natural disaster Eg. Tsunami, Earth Quake. Nationalisation Eg. TISCO. Hostile take-over Eg. Bajoria Bombay Dyeing. Group disintegration Eg. Reliance. 54

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