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MODULE 2
LEARNING MODULE
BLENDED FLEXIBLE LEARNING
Strategic Management and Total Quality Management (RMEC 412)

AN OVERVIEW

INTRODUCTION

Successful managers must recognize opportunities and threats in their firm’s

external environment. They must be aware of what’s going on outside their company. If
they focus exclusively on the efficiency of internal operations, the firm may degenerate
into the world’s most efficient producer of buggy whips, typewriters, or carbon paper.
But if they miscalculate the market, opportunities will be lost—hardly an enviable
position for their firm. As we saw from the Airbus A380 example, miscalculating the
market demands can lead to negative consequences.

In Competing for the Future, Gary Hamel and C. K. Prahalad suggest that “every
manager carries around in his or her head a set of biases, assumptions, and presup-
positions about the structure of the relevant ‘industry,’ about how one makes money in
the industry, about who the competition is and isn’t, about who the customers are and
aren’t, and so on. “Environmental analysis requires you to continually question such
assumptions. Peter Drucker, considered the father of modern management, labeled
these interrelated sets of assumptions the “theory of the business. “Mattress Firm was
blindsided by startups such as Casper, which recognized how miserable mattress
shopping could be and promised a better experience.

A firm’s strategy may be good at one point in time, but it may go astray when
management’s frame of reference gets out of touch with the realities of the actual
business situation. This results when management’s assumptions, premises, or beliefs
are incorrect or when internal inconsistencies among them render the overall “theory of
the business” invalid. As Warren Buffett, investor extraordinaire, colorfully notes,
“Beware of past performance ‘proofs.’ If history books were the key to riches, the
Forbes 400 would consist of librarians.”

LEARNING OUTCOMES
At the end of this module, you should be able to:
1. Understand the importance of developing forecasts of the business
environment.
2. Explain why environmental scanning, environmental monitoring, and
collecting competitive intelligence are critical inputs to forecasting.
3. Recognize the impact of the general environment on a firm’s strategies and
performance.
4. Explain how forces in the competitive environment can affect profitability,
and how a firm can improve its competitive position by increasing its power
vis-à-vis these forces.

LEARNING RESOURCES

Dess, Eisner, Lee, McNamara, (2021) Strategic Management: Text and Cases, McGraw-
Hill Education, New York, USA.

LEARNING INPUTS

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 THE ROLE OF SCANNING, MONITORING, COMPETITIVE
LESSON 1
X INTELLIGENCE, AND FORECASTING

A. Environmental Scanning

It involves surveillance of a firm’s external environment to predict environmental

changes and detect changes already underway. This alerts the organization to critical
trends and events before changes develop a discernible pattern and before competitors
recognize them. Otherwise, the firm may be forced into a reactive mode.

Experts agree that spotting key trends requires a combination of knowing your
business and your customer as well as keeping an eye on what’s happening around you.
Such a big picture/small-picture view enables you to better identify the emerging trends
that will affect your business.

Leading firms in an industry can also be a key indicator of emerging trends. For
example, with its wide range of household goods, Procter & Gamble is a barometer for
consumer spending. Any sign that it can sell more of its premium products without
cutting prices sharply indicates that shoppers may finally be becoming less price-
sensitive with everyday purchases. In particular, investors will examine the performance
of beauty products like Olay moisturizers and CoverGirl cosmetics for evidence that
spending on small, discretionary pick-me-ups is improving.

B. Environmental Monitoring

It tracks the evolution of environmental trends, sequences of events, or streams of

activities. They may be trends that the firm came across by accident or ones that were
brought to its attention from outside the organization. Monitoring enables firms to
evaluate how dramatically environmental trends are changing the competitive
landscape.

C. Competitive Intelligence

It helps firms define and understand their industry and identify rivals’ strengths and
weaknesses. This includes the intelligence gathering associated with collecting data on
competitors and interpreting such data. Done properly, competitive intelligence helps a
company avoid surprises by anticipating competitors’ moves and decreasing response
time.

Examples of competitive analysis are evident in daily newspapers and periodicals

such as The Wall Street Journal, Bloomberg Businessweek, and Fortune. For example,
banks continually track home loan, auto loan, and certificate of deposit (CD) interest
rates charged by rivals. Major airlines change hundreds of fares daily in response to
competitors’ tactics. Car manufacturers are keenly aware of announced cuts or
increases in rivals’ production volume, sales, and sales incentives (e.g., rebates and low
interest rates on financing). This information is used in their marketing, pricing, and
production strategies.

Keeping track of competitors has become easier today with the amount of
information that is available on the Internet. The following are examples of some
websites that companies routinely use for competitive intelligence gathering:

 Slideshare. A website for publicly sharing PowerPoint presentations. Marketing

teams have embraced the platform and often post detail-rich presentations
about their firms and products.

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  Quora. A question-and-answer site popular among industry insiders who
embrace the free flow of information about technical questions.
 iSpionage. A site that reveals the ad words that companies are buying, which can
often shed light on new campaigns being launched.
 YouTube. Great for finding interviews with executives at trade shows.

D. Environmental Forecasting

It involves the development of plausible projections about the direction, scope, speed,
and intensity of environmental change. Its purpose is to predict change. It asks: How
long will it take a new technology to reach the marketplace? Will the present social
concern about an issue result in new legislation? Are current lifestyle trends likely to
continue?

Some forecasting issues are much more specific to a particular firm and the industry in
which it competes. Consider how important it is for Motel 6 to predict future indicators,
such as the number of rooms, in the budget segment of the industry. If its predictions
are too optimistic, it will build too many units, creating a surplus of room capacity that
would drive down room rates.

A danger of forecasting is that managers may view uncertainty as black and white and
ignore important gray areas. The problem is that underestimating uncertainty can lead
to strategies that neither defend against threats nor take advantage of opportunities.

E. Scenario Analysis

It is a more in-depth approach to forecasting. It draws on a range of disciplines and

interests, among them economics, psychology, sociology, and demographics. It usually
begins with a discussion of participants’ thoughts on ways in which societal trends,
economics, politics, and technology may affect an issue. Scenario analysis involves the
projection of future possible events. It does not rely on extrapolation of historical
trends. Rather, it seeks to explore possible developments that may only be connected to
the past.

LESSON 2 SWOT ANALYSIS

To understand the business environment of a particular firm, you need to analyze

both the general environment and the firm’s industry and competitive environment.
Generally, firms compete with other firms in the same industry. An industry is composed
of a set of firms that produce similar products or services, sell to similar customers, and
use similar methods of production. Gathering industry information and understanding
competitive dynamics among the different companies in your industry is key to
successful strategic management.

One of the most basic techniques for analyzing firm and industry conditions is SWOT
analysis. SWOT stands for strengths, weaknesses, opportunities, and threats. It provides
“raw material”—a basic listing of conditions both inside and surrounding your company.

The Strengths and Weaknesses refer to the internal conditions of the firm—where
your firm excels (strengths) and where it may be lacking relative to competitors
(weaknesses). Opportunities and Threats are environmental conditions external to the
firm. These could be factors in either the general or the competitive environment. In the
general environment, one might experience developments that are beneficial for most
companies, such as improving economic conditions that lower borrowing costs, or

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trends that benefit some companies and harm others. An example is the heightened
concern with fitness, which is a threat to some companies (e.g., tobacco) and an
opportunity to others (e.g., health clubs). Opportunities and threats are also present in
the competitive environment among firms competing for the same customers.

The general idea of SWOT analysis is that a firm’s strategy must:

 Build on its strengths.
 Remedy the weaknesses or work around them.
 Take advantage of the opportunities presented by the environment.
 Protect the firm from the threats.

Despite its apparent simplicity, the SWOT approach has been very popular. First, it
forces managers to consider both internal and external factors simultaneously. Second,
its emphasis on identifying opportunities and threats makes firms act proactively rather
than reactively. Third, it raises awareness about the role of strategy in creating a match
between the environmental conditions and the firm’s internal strengths and
weaknesses. Finally, its conceptual simplicity is achieved without sacrificing analytical
rigor.

LESSON 3 THE GENERAL ENVIRONMENT

The
general environment is composed of factors that can have dramatic effects on firm
strategy. We divide the general environment into six segments: demographic,
sociocultural, political/legal, technological, economic, and global.

A. The Demographic Segment

Demographics are the most easily understood and quantifiable elements of the
general environment. They are at the root of many changes in society. Demographics
include elements such as the aging population, rising or declining affluence, changes in
ethnic composition, geographic distribution of the population, and disparities in income
level.

The impact of a demographic trend, like all segments of the general environment,
varies across industries. Rising levels of affluence in many developed countries bode
well for brokerage services as well as for upscale pets and supplies. However, this trend
may adversely affect fast-food restaurants because people can afford to dine at higher-
priced restaurants. Fast-food restaurants depend on minimum-wage employees to
operate efficiently, but the competition for labor intensifies as more attractive
employment opportunities become prevalent, thus threatening the employment base
for restaurants.

B. The Sociocultural Segment

Sociocultural forces influence the values, beliefs, and lifestyles of a society. Examples
include a higher percentage of women in the workforce, dual-income families, increases
in the number of temporary workers, greater concern for healthy diets and physical
fitness, greater interest in the environment, and postponement of having children. Such
forces enhance sales of products and services in many industries but depress sales in
others. The increased number of women in the workforce has increased the need for
business clothing merchandise but decreased the demand for baking product staples
(since people would have less time to cook from scratch). The health and fitness trend

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have helped industries that manufacture exercise equipment and healthful foods but
harmed industries that produce unhealthful foods.

C. The Political/Legal Segment

The Political/Legal/Regulatory Environment can be essentially depicted as the laws and
guidelines that business needs to follow so as to ensure the entrepreneurs don't get
captured, or have the business fined for resistance of some guideline. Laws are made by
government officials - who authorize these laws dependent on the probability they will
get re-chose. The world of politics is influenced and affected by government officials
who thus are impacted by changes and difficulties in the social - social environment
(dialects, ethnicity, migration and so on.), challenges in the monetary environment (cash
trade rates, corporate movement, joblessness rates) and furthermore somewhat the
geographic condition as far as how the locale is spread out, waterways, mountains,
nearness to different nations, climate, seasons and so on.

D. The Technological Segment

Developments in technology lead to new products and services and improve how they
are produced and delivered to the end user. Innovations can create entirely new
industries and alter the boundaries of existing industries. Technological developments
and trends include genetic engineering, Internet technology, research in artificial and
exotic materials, and, on the downside, pollution and global warming. Petroleum and
primary metals industries spend significantly to reduce their pollution. Engineering and
consulting firms that work with polluting industries derive financial benefits from solving
such problems.

E. The Economic Segment

The economy affects all industries, from suppliers of raw materials to manufacturers of
finished goods and services, as well as all organizations in the service, wholesale, retail,
government, and nonprofit sectors. Key economic indicators include interest rates,
unemployment rates, the consumer price index, the gross domestic product, and net
disposable income.49 Interest rate increases have a negative impact on the residential
home construction industry but a negligible (or neutral) effect on industries that
produce consumer necessities such as prescription drugs or common grocery items.

LESSON 4 THE COMPETITIVE ENVIRONMENT

Managers must consider the competitive environment (also sometimes referred to

as the task or industry environment). The nature of competition in an industry, as well
as the profitability of a firm, is often directly influenced by developments in the
competitive environment.

The competitive environment consists of many factors that are particularly relevant
to a firm’s strategy. These include competitors (existing or potential), customers, and
suppliers. Potential competitors may include a supplier considering forward integration,
such as an automobile manufacturer acquiring a rental car company, or a firm in an
entirely new industry introducing a similar product that uses a more efficient
technology.

The “five forces” model developed by Michael E. Porter has been the most commonly
used analytical tool for examining the competitive environment. It describes the
competitive environment in terms of five basic competitive forces:
1. The threat of new entrants.

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2. The bargaining power of buyers.
3. The bargaining power of suppliers.
4. The threat of substitute products and services.
5. The intensity of rivalry among competitors in an industry.

 The Threat of New Entrants. The threat of new entrants refers to the possibility
that the profits of established firms in the industry may be eroded by new
competitors. The extent of the threat depends on existing barriers to entry and
the combined reactions from existing competitors. If entry barriers are high
and/or the newcomer can anticipate a sharp retaliation from established
competitors, the threat of entry is low. These circumstances discourage new
competitors. There are six major sources of entry barriers.
 Economies of Scale. Economies of scale refers to spreading the costs of
production over the number of units produced. The cost of a product per unit
declines as the absolute volume per period increases. This deters entry by
forcing the entrant to come in at a large scale and risk strong reaction from
existing firms or come in at a small scale and accept a cost disadvantage. Both
are undesirable options.
 Product Differentiation. When existing competitors have strong brand
identification and customer loyalty, product differentiation creates a barrier to
entry by forcing entrants to spend heavily to overcome existing customer
loyalties.
 Capital Requirements. The need to invest large financial resources to compete
creates a barrier to entry, especially if the capital is required for risky or
unrecoverable up-front advertising or research and development (R&D).
 Switching Costs. A barrier to entry is created by the existence of one-time costs
that the buyer faces when switching from one supplier’s product or service to
another.
 Access to Distribution Channels. The new entrant’s need to secure distribution
for its product can create a barrier to entry