UNIT-2

Environmental appraisal :- It is method or technique to draw a clear picture of what opportunities and
threat are feed by the organization at the given time.
An environmental analysis in plays an essential role in business management by providing possible
opportunities or threats outside the company in its external environment. The purpose of an
environmental analysis is to help to develop a plan by keeping decision-makers within an organization.
It is done while scanning the Eight sector of the environment which are follows:
1) Economic environment
2) International environment
3) Regulatory environment
4) Market environment
5) Political environment
6) Sociocultural environment
7) Supplier environment
8) Technological environment

Factors affecting Environmental scanning / Environmental Appraisal

 Strategist related factors – It includes age education experience motivation and ability to with
stand time pressure and strain of responsibility.
 Organization related factors – It is affected by nature of business age and size of business
complexity of business nature of its market and products and services.
 Environment related factors – The nature of environment faced by the organization determines
how its appraisal could be done.The nature of environment depend upon its
complexity,volatility,hostility and diversity.
 Types of business - the type of business the organization is in or intends to be in determines the
nature of information sought. Moreover, how an organizational defines its business also becomes
an important factor determining the information requirements. If the organization has defined its
business narrowly, it will focus on the narrow aspect on the environment, thus a highly diversified
company may require diverse types of the information. Similarly if an organization is its area of
information search may be much broader.
 Volatility of the environment - emphasis on environmental study and type of information needed
an organizational are also dependent upon the nature of the environment. If the business
environment is highly voltaic and turbulent, the management must be greatly concerned with the
external environment and they would attempt to gather as much information as possible. This will
be further reinforced id the environmental shows less functional, central managers show less
concern towards the economic and the technological components of the environment and focus
their environmental analysis on competitions. This is more so when environmental analysis on
competitions. This is more so when environmental forces are relatively more homogeneous and
clustered.

IMPORTANCE OF ENVIRONMENTAL APPRAISAL

1. Identification of strength:

Strength of the business firm means capacity of the firm to gain advantage over its competitors. Analysis of
internal business environment helps to identify strength of the firm. After identifying the strength, the firm
must try to consolidate or maximise its strength by further improvement in its existing plans, policies and
resources.
2. Identification of weakness:

Weakness of the firm means limitations of the firm. Monitoring internal environment helps to identify not
only the strength but also the weakness of the firm. A firm may be strong in certain areas but may be weak
in some other areas. For further growth and expansion, the weakness should be identified so as to correct
them as soon as possible.

3. Identification of opportunities:

Environmental analyses helps to identify the opportunities in the market. The firm should make every
possible effort to grab the opportunities as and when they come.

4. Identification of threat:

Business is subject to threat from competitors and various factors. Environmental analyses help them to
identify threat from the external environment. Early identification of threat is always beneficial as it helps
to diffuse off some threat.

5. Optimum use of resources:

Proper environmental assessment helps to make optimum utilisation of scare human, natural and capital
resources. Systematic analyses of business environment helps the firm to reduce wastage and make
optimum use of available resources, without understanding the internal and external environment
resources cannot be used in an effective manner.

6. Survival and growth:

Systematic analyses of business environment help the firm to maximise their strength, minimise the
weakness, grab the opportunities and diffuse threats. This enables the firm to survive and grow in the
competitive business world.

7. To plan long-term business strategy:

A business organisation has short term and long-term objectives. Proper analyses of environmental factors
help the business firm to frame plans and policies that could help in easy accomplishment of those
organisational objectives. Without undertaking environmental scanning, the firm cannot develop a strategy
for business success.

8. Environmental scanning aids decision-making:

Decision-making is a process of selecting the best alternative from among various available alternatives. An
environmental analysis is an extremely important tool in understanding and decision making in all situation
of the business. Success of the firm depends upon the precise decision making ability. Study of
environmental analyses enables the firm to select the best option for the success and growth of the firm.

Strategic Analysis and Choice – Nature of Strategy Analysis and Choice

Strategy analysis and choice focuses on generating and evaluating alternative strategies, as well as on
selecting strategies to pursue. Strategy analysis and choice seeks to determine alternative courses of action
that could best enable the firm to achieve its mission and objectives.
The firm’s present strategies, objectives, and mission together with the external and internal audit
information, provide a basis for generating and evaluating feasible alternative strategies. The alternative
strategies represent incremental steps that move the firm from its current position to a desired future
state.

Alternative strategies are derived from the firm’s vision, mission, objectives, external audit, and internal
audit and are consistent with past strategies that have worked well. The strategic analysis discusses the
analytical techniques in two stages i.e. techniques applicable at corporate level and then techniques used
for business-level strategies.

The techniques that have been discussed for the corporate level include BCG matrix, GE nine-cell planning
grid, Hofer’s matrix and Shell Directional Policy Matrix and the techniques for business- level include SWOT
analysis, experience curve analysis, grand strategy selection matrix, grand strategy clusters.

Strategic Analysis at the Corporate Level: Techniques

Strategic analysis at the corporate level treats a corporate body constituting a portfolio of businesses in a
corporate vase. The analysis considers the various issues regarding the several businesses in the corporate
portfolio.
The strategic options are the generic strategies of stability, expansion, retrenchment, and combination.
The corporate level strategic analysis is relevant to a multi-business corporation. For single business
entities, business-level strategic analysis would suffice.
Corporate Portfolio Analysis:
Corporate portfolio analysis can be defined as a group of techniques that assist strategists in making
strategic decisions regarding individual products or businesses in a firm’s portfolio. Corporate portfolio
analysis may be employed for competitive analysis and strategic planning in multi-business corporations as
well as for less diversified firms.
The main benefit of using a portfolio approach in a multi-business corporation lies in allocating resources at
the corporate level to the businesses with highest potential. For instance, a well -diversified company may
consider diverting resources from cash-rich businesses to the businesses with faster-growth potential to
achieve corporate objectives in an optimal way.

A number of techniques considered suitable for corporate portfolio analysis are discussed below:
The TOWS matrix is an important tool that helps managers develop four types of strategies:

(a) SO Strategies

(b) WO Strategies

(c) ST Strategies

(d) WT Strategies

Matching key external and internal factors is the most tedious part of developing a TOWS Matrix. It
requires good judgment. However, there is no one best set of matches.

(a) SO Strategies:

SO strategies use a firm’s internal strengths to take advantage of external opportunities. All managers
would like their organization to be in a position in which internal strengths can be used to take advantage
of external trends and events. Organizations generally will pursue WO, ST, or WT strategies in order to get
into a situation in which they can apply SO Strategies.
When a firm has major weaknesses, it will strive to overcome them and convert them into strengths. When
an organization confronts major threats, it will attempt to avoid them in order to focus on opportunities.

(b) WO Strategies:

WO strategies focus at improving internal weaknesses by taking advantage of external opportunities.

Sometimes a firm may have key external opportunities but it may have internal weaknesses that can
prevent it from exploiting them.

For example, there may be a huge demand for electronic devices to control the amount and timing of fuel
injection in automobile engines (opportunity), but a certain auto parts manufacturer may not possess the
technology required for producing these devices (weakness).

The firm may consider one possible WO strategy to acquire this technology by forming a joint venture with
a firm having competency in this area. Another WO strategy may be to hire and train internal people with
the required technical capabilities.

(c) ST Strategies:

ST strategies make use of firm’s strengths to minimize the impact of external threats.

(d) WT Strategies:

WT strategies are defensive tactics directed at reducing internal weakness and avoiding external threats.
An organization faced with numerous external threats and internal weaknesses may indeed be in a
precarious position. In fact, such a firm may have to battle for its survival, merge, retrench, declare
bankruptcy, or choose liquidation.

The TOWS matrix involves eight steps:

1. List the firm’s key external opportunities.

2. List the firm’s key external threats.

3. List the firm’s key internal strengths.

4. List the firm’s key internal weaknesses.

5. Match internal strengths with external opportunities, and record the resultant SO Strategies in the
appropriate cell.

6. Match internal weaknesses with external opportunities, and record the resultant WO Strategies.

7. Match internal strengths with external threats, and record the resultant ST Strategies.

8. Match internal weaknesses with external threats, and record the resultant WT Strategies.

Strategic Position and Action Evaluation (SPACE) Matrix:

The Strategic Position and Action Evaluation (SPACE) matrix is another important matching tool. Its four-
quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies are
most appropriate for a given organization.
The axes of the matrix represent two internal dimensions (financial strength (FS)) and competitive
advantage (CA) and two external dimensions (environmental stability (ES)) and industry strength (IS). These
four factors are the most important determinants of an organization’s overall strategic position.

Depending upon the type of organization, several variables could make up each of the dimensions
represented on the axes of the SPACE matrix.

Strategic Analysis and Choice – Strategic Choice at Business Level: Approaches

Once a multi-industry firm has identified business units in terms of invest, hold, or harvest, each business
unit may identify and evaluate its grand strategy alternatives.

A single business should consider a number of approaches in selecting its grand strategy. Here we will
discuss SWOT analysis, experience curve analysis, life cycle analysis, grand strategy selection matrix and
grand strategy clusters.

SWOT Analysis:

SWOT stands for Strengths and Weaknesses of a business and environmental Opportunities and Threats a
business faces. SWOT analysis identifies systematically these factors and the strategy that reflects the best
match between them. It is based on the assumption that an effective strategy maximizes a business’s
strengths and opportunities and minimizes its weakness and threats.

An opportunity is a major favorable situation in the firm’s environment. Key trends, such as identification
of a previously overlooked market segment, changes in competitive or regulatory circumstances,
technological changes, and improved buyer or supplier relations, are the sources of opportunities for a
firm.

A threat stands for a major unfavorable situation in the firm’s environment or an impediment to the firm’s
current and/or desired future position. The major threats to a firm’s future success might include the
factors such as the entry of new competitor, increased bargaining power of buyer or supplier, major
technological change, slow market growth and changing regulations.

For instance increasing use of personal computers was a major opportunity for IBM. An opportunity for
one firm can be a strategic threat to another. If the managers of a firm clearly understand the
opportunities and threats their firm is likely to face, it assists them to identify realistic strategic alternatives
and clarifies the most effective niche for the firm.

Strength is a resource, skill, a distinctive competence or other advantage and the needs of markets a firm
serves or anticipates serving that gives the firm a comparative advantage relative to competitors in the
marketplace. Financial resources, image, market leadership, and buyer/supplier relations are examples of
strength.

A weakness is a limitation or deficiency in resources, skills and capabilities that seriously impedes effective
performances. Facilities, financial resources, management capabilities, marketing skills, and brand image
could be sources of weaknesses.

Identification of key strengths and weaknesses of the firm helps in narrowing down the choice of
alternatives and choosing a strategy. While identification of distinctive competence and critical weaknesses
in relation to key determinants of success for different market segments provides a useful framework for
choosing the best strategy.
SWOT analysis helps in two ways in strategic choice decision-making:

1. It provides a logical framework for guiding systematic discussions of the business’s situation, alternative
strategies, and, the choice of strategy.
2. It provides a structured approach for the systematic comparison of key external opportunities and
threats with internal strengths and weaknesses.

For strategy formulation, the firm attempts to build upon its strengths and eliminate its weaknesses. When
the firm does not possess the skills required to take advantage of opportunities or avoid threats, the
necessary resources may be identified from the SWOT analysis and steps taken to procure the strengths or
to reduce any weaknesses.

Environmental Threat and Opportunity Profile (ЕТОР)!

The Environmental factors are quite complex and it may be difficult for strategy managers to classify them
into neat categories to interpret them as opportunities and threats. A matrix of comparison is drawn
where one item or factor is compared with other items after which the scores arrived at are added and
ranked for each factor and total weight age score calculated for prioritizing each of the factors.

This is achieved by brainstorming. And finally the strategy manger uses his judgment to place various
environmental issues in clear perspective to create the environmental threat and opportunity profile.

Although the technique of dividing various environmental factors into specific sectors and evaluating them
as opportunities and threats is suggested by some authors, it must be carefully noted that each sector is
not exclusive of the other.

Each of the major factors pertaining to a particular sector of environment may be divided into sub-sectors
and their effects studied. The field force analysis goes hand in glove with ETOP, as here also the
contribution with regard to opportunities and threats posed by the environment is also a necessary part of
study.

ETOP Preparation:

The preparation of ETOP involves dividing the environment into different sectors and then analyzing the
impact of each sector on the organization. A comprehensive ETOP requires subdividing each environmental
sector into sub factors and then the impact of each sub factor on the organization is described in the form
of a statement.
Organizational Capability Profile (OCP)
An organizational capability profile describes the skills,knowledge and resources that enable your company
to provide quality products or services to customers. The profile provides useful background information
for your marketing and corporate communications.

Organizational Capability Profile (OCP)

Financial Capability Profile
(a) Sources of funds
(b) Usage of funds
(c) Management of funds
Marketing Capability Profile
(a) Product related
(b) Price related
(c) Promotion related
(d) Integrative & Systematic

Operations Capability Factor

(a) Production system
(b) Operation & Control system
(c) R&D system
Personnel Capability Factor
(a) Personnel system
(b) Organization & employee characteristics
(c) Industrial Relations
General Management Capability
(a) General Management Systems
(b) External Relations
(c) Organization climate

SAP(STRATEGY ADVANCE PROFILE)

Strategic advantage profile is known as SAP. It shows strength and weakness of an organization.
Preparation of SAP is very similar process to the ETOP. There are generally five functional areas in most of
the organizations.strategic advantage profile is a summary statement which provides an overview of the
advantages and disadvantages in key areas likely to affect future operations of a firm. it is a total for
making systematic evaluation of strategic advantage factors which are significant for the company in its
environment. it involves functional areas like marketing, production, finance, accounting, personnel,
human resource and R$D

These functional areas are listed to identify their relative strength and weakness in SAP. Each functional
area is very broad having many components inside.

SAP

A PICTURE OF THE MORE CRITICAL AREA WHICH CAN HAVE A RELATIONSHIP OF THE STRATEGIC POSTURE
OF THE FIRM IN FUTURE

Capability factor competitive strength & weaknesses

Finance down high cost of capital reserve & surplus

Marketing neutral violent competition,company position secure

Oprational up p&m-execellet part & component available

Personal neutral quality of managment & personal par with competetion

General mgt up high quality experienced top mgt-take proctive stance

What Are Porter's Five Forces?

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every
industry and helps determine an industry's weaknesses and strengths. Five Forces analysis is frequently
used to identify an industry's structure to determine corporate strategy. Porter's model can be applied to
any segment of the economy to understand the level of competition within the industry and enhance a
company's long-term profitability. The Five Forces model is named after Harvard Business School
professor, Michael E. Porter.

 Porter's Five Forces is a framework for analyzing a company's competitive environment.

 The number and power of a company's competitive rivals, potential new market entrants,
suppliers, customers, and substitute products influence a company's profitability.
 Five Forces analysis can be used to guide business strategy to increase competitive advantage.
Porter’s Five Forces Model of Competition

Porter’s five forces model of competition, five forces that always impact the whole market, especially the
competition level.

1.Threats of New Entrants:

The first force of Porter’s five forces model of competition is the entrance of new competitors in the
market. The new entrants entering into a certain industry increases the level of competition among the
Business Organizations of that industry.

2.Bargaining Power of Customers:

The buying power of customers is influenced by the level of competition. When there are relatively large
numbers of producers than the customers have more options to make the selection of the products. So,
this increases the second force of the porter model which is the bargaining power of the customers.

3.Threats of Substitutes:

The third force of Porter’s five forces model of competition is the threats of substitutes. When there is a
higher degree of threat of new entrants in a certain industry, then this would result in an increase in the
competition which would further cause the increasing number of substitute products.

4.Bargaining Power of Suppliers:

When there are more suppliers in a specific industry, then this would result in an increase in the bargaining
power of producers/customers and vice versa.

5.Rivalry among Competing Organizations:

The last and fifth force of Porter five forces model of competition is rivaled exist int the market. When
there are large numbers of manufacturers and variety of different products, then the rivalry among the
organizations of same industry increases, which concentrates more on manufacturing & provision of higher
quality products that can satisfy all the demands of the customers in an effective way so that the
competition can be properly managed. So the rivalry among competing organizations is said to be the fifth
force of Porter five force model of competition.

What is the McKinsey 7S Model?

The McKinsey 7S Model refers to a tool that analyzes a company’s “organizational design.” The goal of the
model is to depict how effectiveness can be achieved in an organization through the interactions of seven
key elements – Structure, Strategy, Skill, System, Shared Values, Style, and Staff.

Structure of the McKinsey 7S Model

Structure, Strategy, and Systems collectively account for the “Hard Ss” elements, whereas the remaining
are considered “Soft Ss.”

1. Structure

Structure is the way in which a company is organized – chain of command and accountability relationships
that form its organizational chart.

2. Strategy

Strategy refers to a well-curated business plan that allows the company to formulate a plan of action to
achieve a sustainable competitive advantage, reinforced by the company’s mission and values.

3. Systems

Systems entail the business and technical infrastructure of the company that establishes workflows and
the chain of decision-making.
4. Skills

Skills form the capabilities and competencies of a company that enables its employees to achieve its
objectives.

5. Style

The attitude of senior employees in a company establishes a code of conduct through their ways of
interactions and symbolic decision-making, which forms the management style of its leaders.

6. Staff

Staff involves talent management and all human resources related to company decisions, such as training,
recruiting, and rewards systems

7. Shared Values

The mission, objectives, and values form the foundation of every organization and play an important role in
aligning all key elements to maintain an effective organizational design.

GE NINE CELL MODEL :-

General Electric (USA), along with McKinsey, developed a matrix as a technique for portfolio
analysis. The GE-Mckinsey matrix has two main variables which are plotted on the X and Y-axis of the
matrix. The variables are “Market Attractiveness” & “Business Unit Strength”.

Once each product is given a value for its market attractiveness and business unit strength, it is plotted in
the position on the graph. Once the product is in its place, the management can decide the strategy for the
product.  The GE-Mckinsey matrix is also known as the nine-box matrix because there are nine boxes on
the graph.

If a business unit is strong with strong market attractiveness, the company should grow the business. If the
business unit strength or market attractiveness is average, the company should hold the business as it is.

In this case, it is possible that the market is dropping in value, or that there is very high competition making
it hard for the business unit to catch up. If the business unit or market has become unattractive, the
company should either sell or liquidate the business or hold it for any residual value it has.
The best step, in this case, would be to dispose of the weak businesses and reinvest the money earned
from the divestiture into business units that are growing. Thus, based on the GE-McKinsey matrix, a
company can manage its product portfolio efficiently and can take the right decisions of growing, hold or
harvest for its products.

What Is Distinctive Competence?

Distinctive competence refers to a superior characteristic, strength, or quality that distinguishes a company
from its competitors. This distinctive quality can be just about anything—innovation, a skill, design,
technology, name recognition, marketing, workforce, customer satisfaction, or even being first to market.

Via distinctive competency, a company can provide a premier value to customers. This unique aspect of
the company, product, or service is difficult to imitate by the competition and creates a strong competitive
advantage.  

Why Distinctive Competency Is Important

To be successful in the short- and long-term, companies need both core and distinctive competencies. 

Distinctive competencies enable companies to:

 Increase competitive advantage

 Improve customer delight and loyalty
 Stand apart from competitors
 Be difficult to imitate 
 Strengthen strategy 

Distinctive competence isn’t set in stone, however. Changes and trends in the market will inevitably impact
competencies. As a result, companies that build and reconfigure distinctive competencies are poised for
long-term success in an ever-changing marketplace and world.
Its consist :
1) the cultural leaving in org.
2) Coordination of diverse production skill
3) Integrate multiple stream of technologies
4) Delivery of value
5) Difficult to replicate by their rivals

Selection of matrix

Each matrix has its own strength and weaknesses.selection of best matrix for solving and formulating the
company strategy is a tough task of strategy.
Its require the following:
1) Company industry attractiveness
2) Company business units strength
3) Company business unit performance
4) Strategic fit analysis
5) Formulating a corporate strategy