STRATEGIC MANAGEMENT

(KMBN 301)

UNIT – 2

Environmental Scanning - Internal & External Analysis of Environment

Organizational environment consists of both external and internal factors.

Environment must be scanned so as to determine development and forecasts of
factors that will influence organizational success. Environmental scanning refers
to possession and utilization of information about occasions, patterns, trends,
and relationships within an organization’s internal and external environment. It
helps the managers to decide the future path of the organization. Scanning must
identify the threats and opportunities existing in the environment. While strategy
formulation, an organization must take advantage of the opportunities and
minimize the threats. A threat for one organization may be an opportunity for
another.

Internal analysis of the environment is the first step of environment scanning.

Organizations should observe the internal organizational environment. This
includes employee interaction with other employees, employee interaction with
management, manager interaction with other managers, and management
interaction with shareholders, access to natural resources, brand awareness,
organizational structure, main staff, operational potential, etc. Also, discussions,
interviews, and surveys can be used to assess the internal environment. Analysis
of internal environment helps in identifying strengths and weaknesses of an
organization.

As business becomes more competitive, and there are rapid changes in the
external environment, information from external environment adds crucial
elements to the effectiveness of long-term plans. As environment is dynamic, it
becomes essential to identify competitors’ moves and actions. Organizations have
also to update the core competencies and internal environment as per external
environment. Environmental factors are infinite, hence, organization should be
agile and vigile to accept and adjust to the environmental changes.

For instance - Monitoring might indicate that an original forecast of the prices of
the raw materials that are involved in the product are no more credible, which
could imply the requirement for more focused scanning, forecasting and analysis
to create a more trustworthy prediction about the input costs. In a similar
manner, there can be changes in factors such as competitor’s activities,
technology, market tastes and preferences.

While in external analysis, three correlated environment should be studied and

analyzed —

 immediate / industry environment

 national environment
 broader socio-economic environment / macro-environment

Examining the industry environment needs an appraisal of the competitive

structure of the organization’s industry, including the competitive position of a
particular organization and it’s main rivals. Also, an assessment of the nature,
stage, dynamics and history of the industry is essential. It also implies evaluating
the effect of globalization on competition within the industry. Analyzing
the national environment needs an appraisal of whether the national framework
helps in achieving competitive advantage in the globalized environment. Analysis
of macro-environment includes exploring macro-economic, social, government,
legal, technological and international factors that may influence the environment.
The analysis of organization’s external environment reveals opportunities and
threats for an organization.

Strategic managers must not only recognize the present state of the environment
and their industry but also be able to predict its future positions.
Objectives of Environmental Scanning

Coates (1985) identified the following objectives of an environmental scanning

system:

1) Detecting scientific, technical, economic, social, and political trends and events
important to the institution,

2) Defining the potential threats, opportunities, or changes for the institution

implied by those trends and events,

3) Promoting a future orientation in the thinking of management and staff, and

4) Alerting management and staff to trends that are converging, diverging,

speeding up, slowing down, or interacting.

Importance of Environmental Scanning

Oladele (2006) stated some importance to environmental scanning as follows:

a) The environment is dynamic in nature, therefore scanning is necessary to keep

abreast of change.

b) It reveals the elements or factors that constitute threats and opportunity to the
overall objectives of the organization.

c) Competitor’s activities can be monitored and appropriate strategies put in

place to check market incursion.

d) It gives necessary inputs to the formulation and implementation of potent

marketing strategies.

Methods of Environmental Scanning

This aspect of environmental scanning has caused much debate among the
scholars in the field of Management. However, the following are therefore
suggested:
➢ Secondary data collection approach such as articles, textbooks, magazines and
ready-made information etc...

➢ Primary data collection approach, using research instruments such as

questionnaire,

➢ Personal interview, personal observation etc.

➢ Establish a unit within the organization which will responsible to

scan wide range of environmental factors and makes forecast about specific
variables through qualitative and quantitative means.

Kinds of environmental scanning

1.Ad-hoc scanning - Short term, infrequent examinations usually initiated by a

crisis

2.Regular scanning - Studies done on a regular schedule (e.g. once a year)

3.Continuous scanning (also called continuous learning) - continuous structured

data collection and processing on a broad range of environmental factors

PESTEL ANALYSIS

Scanning the Environment: PESTEL Analysis

A PESTEL analysis or PESTLE analysis (formerly known as PEST analysis) is a

framework or tool used to analyse and monitor the macro-environmental factors
that may have a profound impact on an organisation’s performance. This tool is
especially useful when starting a new business or entering a foreign market. It is
often used in collaboration with other analytical business tools such as the SWOT
analysis and Porter’s Five Forces to give a clear understanding of a situation and
related internal and external factors. PESTEL is an acronym that stand for Political,
Economic, Social, Technological, Environmental and Legal factors.

Political Factors:

These factors are all about how and to what degree a government intervenes in
the economy or a certain industry. Basically all the influences that a government
has on your business could be classified here. This can include government policy,
political stability or instability, corruption, foreign trade policy, tax policy, labour
law, environmental law and trade restrictions. Furthermore, the government may
have a profound impact on a nation’s education system, infrastructure and health
regulations. These are all factors that need to be taken into account when
assessing the attractiveness of a potential market.

Economic Factors:

Economic factors are determinants of a certain economy’s performance. Factors

include economic growth, exchange rates, inflation rates, interest rates,
disposable income of consumers and unemployment rates. These factors may
have a direct or indirect long term impact on a company, since it affects the
purchasing power of consumers and could possibly change demand/supply
models in the economy. Consequently it also affects the way companies price
their products and services.

Social Factors:

This dimension of the general environment represents the demographic

characteristics, norms, customs and values of the population within which the
organization operates. This inlcudes population trends such as the population
growth rate, age distribution, income distribution, career attitudes, safety
emphasis, health consciousness, lifestyle attitudes and cultural barriers. These
factors are especially important for marketers when targeting certain customers.
In addition, it also says something about the local workforce and its willingness to
work under certain conditions.

Technological Factors:

These factors pertain to innovations in technology that may affect the operations
of the industry and the market favorably or unfavorably. This refers to technology
incentives, the level of innovation, automation, research and development (R&D)
activity, technological change and the amount of technological awareness that a
market possesses. These factors may influence decisions to enter or not enter
certain industries, to launch or not launch certain products or to outsource
production activities abroad. By knowing what is going on technology-wise, you
may be able to prevent your company from spending a lot of money on
developing a technology that would become obsolete very soon due to disruptive
technological changes elsewhere.

Environmental Factors:

Environmental factors have come to the forefront only relatively recently. They
have become important due to the increasing scarcity of raw materials, polution
targets and carbon footprint targets set by governments. These factors include
ecological and environmental aspects such as weather, climate, environmental
offsets and climate change which may especially affect industries such as tourism,
farming, agriculture and insurance. Furthermore, growing awareness of the
potential impacts of climate change is affecting how companies operate and the
products they offer. This has led to many companies getting more and more
involved in practices such as corprate social responsibility (CSR) and sustainability.

Legal Factors:

Although these factors may have some overlap with the political factors, they
include more specific laws such as discrimination laws, antitrust laws,
employment laws, consumer protection laws, copyright and patent laws, and
health and safety laws. It is clear that companies need to know what is and what
is not legal in order to trade successfully and ethically. If an organisation trades
globally this becomes especially tricky since each country has its own set of rules
and regulations. In addition, you want to be aware of any potential changes in
legislation and the impact it may have on your business in the future.
Recommended is to have a legal advisor or attorney to help you with these kind
of things.
Understanding the Micro Environment

IMPORTANCE OF INTERNAL ANALYSIS

Strategic management is ultimately a “ matching game “ between environmental

opportunities and organisational strengths . But , before a firm actually starts
tapping the opportunities ,it is important to know its own strengths and
weakness. Without this knowledge ,it cannot decide which opportunities to
choose and which ones to reject. One of the ingredients critical to the success of a
strategy is that the strategy must place “realistic “ requirements on the firm’s
resources. The firm therefore cannot afford to go by some untested assumptions
or gut feelings. Only systematic analysis of its strengths and weakness can be of
help. This is accomplished in internal analysis by using analytical techniques like
RBV,SWOT analysis , Value chain analysis , benchmarking , IFE matrix etc .
Thus , systematic internal analysis helps the firm :

• To find where it stands in terms of its strengths and weakness

• To exploit the opportunities that is in accordance with its capabilities

• To analyse and find ways to rectify its weakness

• To defend against threats

• To assess gaps in its capability and take steps to enhance its capabilities with a
view to achieve its growth objectives .This exercise is also the starting point for
developing the competitive advantage required for the survival and growth of the
firm.

RESOURCE BASED VIEW STRATEGY OF COMPETITIVE ADVANTAGE

As a project resource manager, you very well know your teams’ worth. With the
right people on deck, you feel confident signing off on incoming projects. They
use their wealth of experience and skills to resolve bugs that crop up. This also
helps your future projects follow a better cyclic process. It’s safe to say that so
long as they’re invested in productive efforts, your people remain a valuable
resource and their contributions, even more so. After all, no other resource can
be utilized without the right human resource! Technology touches lives, and as
such evolves in response to changing requirements. To keep up with these
changes, you’d need to be on high- alert for resources and capabilities that give
you a competitive advantage. The resource-based view strategy helps you
accomplish this by letting you analyze diversified contributions coming in from
different quarters. You can then match these to opportunities to develop your
competitive advantage.

The original theory behind this view emerged from the works of Birger
Wernerfelt, Prahalad and Hamel who argued that the internal environment can
be a source of competitive advantages. Your job doesn’t end at finding and
developing a competitive advantage though.

It’s more about sustaining it with the effective and efficient utilization of your
people.
CORE COMPETENCY

Core competencies make or break innovation. While everyone can have a

business idea, not all of them have the feasibility to thrive in the market. Those
that do, have to be relevant, useful and adaptive. Simply put, the activities,
knowledge and internal organizational structure within the firm sets you apart
from your competitors. The parameters deciding this are

1. Product reliability

2. Customer insight

3. Exploitation of emerging ideas and innovation

Core competencies point you to resources with different specializations which can
lower your transactional expenses. This in turn, gives them the freedom to
develop new products or modify existing services as per their skills and
capabilities to suit market needs.

Here, heterogeneity plays a pivotal role because if every organization had the
same set of skills and capabilities, they wouldn’t be able to make decisions that
strategically differ.

Toyota is one such example of an automobile giant that utilized its resources and
capabilities to raise its product quality. It pioneered a lean production system that
proved difficult to replicate. Further, It introduced the concept of just-in-time
manufacturing which reduced its setup time. The lowered pricing model and
lasting efficiency rapidly gained widespread popularity which helped Toyota
retain consumer loyalty. Thus, it was able to still reap profits while competing
against Mercedes and BMW models.

By now these questions would pop up in your mind :

1. Why would customers buy your products or services?

2. How are you different from your competitors?

3. How can you bundle your resources in order to gain a market advantage?

4. What are the key success factors that stamp out the competition?
Core competencies stem from the effective procurement and usage of your
resources and capabilities bundled together. Capabilities drive your firm’s ability
to adapt its core competencies over time.

If your future plans include expanding your presence, you need to evaluate your
internal environment beforehand so as to maximize the value added to the
customer chain.

ORGANISATIONAL CAPABILITY FACTORS

FINANCIAL CAPABILITY:

These factors relate to the availability, usage, and management of funds and all
allied aspects that have a bearing on an organization capacity and ability to
implement its strategies.

• Factors related to sources of funds: capital structure, procurement of

capital, controllership, financing pattern, working capital availability, borrowings,
capital and credit availability, reserves and surplus, and relationship with lenders,
banks and financial institutions.

• Factors related to usage of funds: capital investment, fixed asset

acquisition, current assets, loans and advances, dividend distribution, and
relationship with shareholders.

• Factors related to management of funds: financial, accounting and

budgeting systems, management control system, state of financial health, cash,
inflation, credit, return and risk management, cost reduction and control, and tax
.

MARKETTING CAPABILITY:
These factors relate to the pricing, promotion, and distribution of products or
services, and all the allied aspects that have a bearing on an organization capacity
and ability to implement its strategies.

• Product related factors: variety, differentiation, mix quality, positioning,

packaging, etc.

• Price related factors: pricing objectives, policies, changes, protection,

advantages, etc.

• Place related factors: distribution, transportation and logistics, marketing

channels, marketing intermediaries, etc.

• Promotion related factors: promotional tools, sales promotion,

advertising public relations, etc.

• Integrative and systematic factors: marketing mix, market standing,

company image, marketing organization, marketing system, marketing
management information system, etc.

OPERATIONS CAPABILITY:

These factors related to the production of products or services, use of material

resources, and all allied aspects that have a bearing on an organization capacity
and ability to implement its strategies.

• Factors related the production system: capacity, location, layout, product

or service design, work system, degree of automation, extent of vertical
integration, etc.

• Factors related to the operations and control system: aggregate

production planning, material supply; inventory, cost and quality control;
maintenance systems and procedures, etc.
• Factors related to the R&D system: personnel, facilities, product
development, patent rights, level of technology used, technical collaboration
and support, etc.

PERSONNEL CAPABILITY

Personnel capability factors relates to the existence and use of human resources
and skills and all allied aspects that have a bearing on an organization capacity
and ability to implement its strategies.

• Factors related to the personnel system: system manpower planning,

selection, development, compensation, communication and appraisal, position
of the personnel department within the organization, procedures and standards
etc.

• Factors related to organizational and employee characteristics: corporate

image, quality of managers, staff and workers perception about the image of
the organization as an employer, availability of development opportunities for
employers, working condition etc.

• Factors related to industrial relations: union management relationship,

collective bargaining, safety, welfare and security, employee satisfaction and
morale etc.

INFORMATION MANAGEMENT CAPABILITY:

Information management capability factors relate to the design and management

of the flow of information from outside into, and within an organization for the
purpose of decision making and all allied aspects that have a bearing on an
organization capability and ability to implement its strategies.
• Factors related to the acquisition and retention of information: sources,
quantity, quality and timelines of information, retention capacity and security
of information.

• Factors related to processing and synthesis of information: database

management, computer systems, software capability and ability to synthesis
information.

• Factors related to retrieval and usage of information: availability and

appropriateness of information formats and capacity to assimilate and use
information.

• Factors related to transmission and dissemination: speed scope width and

depth of coverage of information and a willing to accept information.

• Integrative systematic and supportive factors: availability of IT

infrastructure, its relevance and compatibility to organizational needs,
upgrading of facilities, willingness to invest in state of the art systems,
availability of computer professionals and top management support.

GENERAL MANAGEMENT CAPABILITY:

General management capability relates to the integration, coordination and

direction of the functional capabilities towards common goals and all allied
aspects that have a bearing on an organization capability and ability to implement
its strategies.

• Factors related to general management system: strategic management

system, processes related to setting strategic intent, strategy formulation and
implementation machinery, strategy evaluation system, MIS corporate planning
system, rewards and incentives system for top managers etc.

• Factors related to general managers: orientation, risk-propensity, value,

norms, personal goals, competence, capacity for work, track record, balance of
functional experience etc.
• Factors related to external relationships: Influence on and rapport with
the government, regulatory agencies and financial; institutions, public relation,
sense of social responsibility, public image as corporate citizen etc

• Factors related to organizational climate: organizational culture, use of

power, political processes, balance of vested interests, introduction, acceptance
and management of change, nature of organizational structure and controls etc.

ORGANIZATIONAL APPRAISAL

METHODS AND TECHNIQUES USED FOR ORGANIZATIONAL APPRAISAL

Internal analysis

1. VRIO framework

2. Value chain analysis

3. Quantitative analysis

a. Financial analysis

b. Non financial analysis

4. Qualitative analysis

Comparative analysis

1. Historical analysis

2. Industry norms

3. Benchmarking
Comprehensive analysis

1. Key factor rating

2. Business intelligence system

3. Balance scorecard

VRIO analysis
What makes your organization special? How close are your competitors to
overtaking you?

The VRIO framework is a strategic planning tool designed to help organizations

uncover and protect the resources and capabilities that give them a long-term
competitive advantage. Note that we’re not simply talking about a list of your
strengths, which are things you do well but are not necessarily unique to your
organization. Nor are we talking about advantages that are fleeting. Sustainable
competitive advantages are those that competitors can’t easily duplicate in the
foreseeable future; they are also a crucial element of business success.

Whether you have one or many sustainable competitive advantages, a VRIO

analysis will help you identify and leverage them as part of your strategic plan.

What is the VRIO framework, and how does it uncover “sustainable competitive
advantage”?

VRIO is an acronym for a four-question framework focusing on value, rarity,

imitability, and organization, the criteria used to evaluate an organization’s
resources and capabilities. You can use a decision tree to help map the outcomes
of your probe, depending on whether you deem a resource as having met the
criteria or not.
To apply the VRIO framework, evaluate each item on the list of Resources and
Capabilities. These may be tangible or intangible items and may consist of
material, financial, or human resources, such as patents, machinery, people skills,
cost advantages, or anything else. Intangible resources tend to be the source of
most sustainable competitive advantages. So this framework must be applied
through the following four lenses:

Value: Do you offer a resource that adds value for customers? Are you able to
exploit an opportunity or neutralize competition with an internal capability?

No: You are at a competitive disadvantage and need to reassess your resources
and capabilities to uncover value.

Yes: If value is established, move on in your VRIO analysis to rarity.

Rarity: Do you control scarce resources or capabilities? Do you own something

that’s hard to find yet in demand?

No: You have value but lack rarity, putting your company in a position of
competitive parity. Your resources are valuable but common, which makes
competing in the marketplace more challenging (but not impossible). It’s
recommended to go back one step and reassess.

Yes: With value and rarity identified, your next hurdle is imitability.

Imitability: Is it expensive to duplicate your organization’s resource or capability?

Is it difficult to find an equivalent substitute to compete with your offerings?

No: If your resource has value and rarity, but is affordable or easy to copy, you
have a temporary competitive advantage. It will require considerable effort to
stay ahead of competitors and differentiate your services—go back one step and
reassess.

Yes: You offer something that’s valuable, rare, and hard to imitate—now the
focus is on your organization.

Organization: Does your company have organized management systems,

processes, structures, and culture to capitalize on resources and capabilities?

No: Without the internal organization and support, it will be difficult to fully
realize the potential of your valuable, rare, and costly-to-imitate resources. Your
company will have a unused competitive advantage and will need to reassess how
to attain the needed organization.

Yes: Your company has achieved the ultimate goal of sustained competitive
advantage when it has successfully identified all four components of the VRIO
framework.

Using resources to gain Competitive advantage & its sustainability

What is Sustainable Competitive Advantage?

A Sustainable Competitive Advantage is the backbone of most businesses that are

thriving today. Businesses that have understood this and followed a Sustainable
Competitive Advantage strategy have remained the market leaders in their
industry for a long time.
The question is, what is this Sustainable Competitive Advantage? Even more than
that, the question would be how to develop this competitive advantage.

A firm enjoys a competitive advantage when it provides its customers benefits

similar to its competitors but at a lower price. That's because it manufactures its
products at a much lower cost as compared to the competitors. The lower cost of
production gives it the cost advantage allowing it to price its products lower than
competitors.

The same firm also enjoys a competitive advantage when it provides its
customer's benefits superior to what is being offered by its competitors, but at
the same price. These excellent benefits give the firm a differentiation advantage.

What Do These Advantages Mean?

These are two strategies for the same objective. Both these advantages translate
into superior value creation for customers and higher profits for the firm. The cost
and differentiation advantages give the firm a positional advantage – either in any
one or both.

What are the Sources of Sustainable Competitive Advantage?

The sustainable competitive advantage sources for any company include Brand
Loyalty, Innovation, Proprietary Information Scale, Intellectual Property,
Innovation, Network- effect.

Brand Loyalty

The strength of the brand drives brand loyalty. Consumers tend to purchase one
brand product continuously.

Ex: Google, Samsung, Amazon.

Innovation

Innovation is the essence to propel. It is the way you use technology to solve the
problems of the customer and create value.

Ex: Apple, Microsoft

Proprietary Information

Any kind of knowledge that the firm possesses which will help in generating value.

Ex: Amazon possesses the purchase information of buyers, which helps them
target customers and provide customized solutions.

Scale

More scale over competitors gives you the advantage to sell at a lower cost and
achieve economies of scale.

Ex: Cost differentiation (Walmart)

Intellectual Property

The possession of rights over specific formulas, processes, or patents.

Ex: Intellectual property rights of Toyota Lean manufacturing Process

Network Effect

When the value of the product increases with increases in the number of
consumers.

Ex: Facebook
How do Firms Gain a Sustainable Competitive Advantage?

A firm uses its capabilities and resources to offer products and services that
customers want. When a firm uses them optimally to produce a product at the
lowest cost and with more features, it creates a cost or differentiation advantage.

The concept becomes clear through the following diagram.

The resource-based view dictates that the firm must have better resources and
capabilities than its competitors to leverage them for a cost or differentiation
advantage. If it is not so, the competitors would easily copy the firm's offerings.

The challenge to firms is to achieve a sustainable competitive advantage through

deploying their resources capably. Porter suggests a way through his matrix
incorporating a source of cost and differentiation advantage juxtaposed against
broad and narrow markets in which the firm competes. This matrix helps to
create generic strategies that can offer a competitive advantage to the firm.
Porter's Generic Strategies Matrix is as per the diagram below.

A firm can achieve either cost leadership or differentiation leadership or derive

the maximum competitive advantage using generic strategies.

Porter further adds that a firm creates value through the value chain, which is the
set of activities performed by the firm and everyone else in the value system in
which the firm operates.
VALUE CHAIN ANALYSIS

A value chain is a set of activities that a firm operating in a specific industry

performs in order to deliver a valuable product (i.e., goodand/or service) for the
market. The concept comes through business management and was first
described by Michael Porter in his 1985 best-seller, Competitive Advantage:
Creating and Sustaining Superior Performance.

Value chain analysis (VCA)

is a process where a firm identifies its primary and support activities that add
value to its final product and then analyze these activities to reduce costs or
increase differentiation.

Porter's Value Chain Analysis

Back in 1985, Michael Porter, a Harvard Business School professor, introduced a

basic value chain model in his book Competitive Advantage. He identified several
key steps common among all value chain analyses and determined that there are
primary and supporting activities that when performed at the most optimal levels
will create value for their customers, such that the value offered to the customer
exceeds the cost of creating that value, resulting in higher profit. Porter’s
framework groups activities into primary and support categories

The primary activities focus on taking the inputs, converting them into outputs,
and delivering the output to the customer. The support activities play an auxiliary
role in primary activities. When a company is efficient in combining these
activities to provide a superior product or service, then the customer is willing to
pay more for the product than the cost to make and deliver the product which
results in a higher profit margin.

The firm’s primary activities include:

 Investment team (portfolio managers, analysts) – tasked with making the

investment decisions.
 Operations and traders – tasked with ensuring the investments are in line
with the guidelines set forth by the client, and the trades are at the best
execution price.
  Marketing and sales – responsible for procuring clients.
 Service (client relationship management) – responsible for providing all the
touch points to the client.

Support activities include:

 Technology – designs a trading and client module that is efficient and

effectively allows the team to provide the highest level of service and make
the best investment decisions.
 Human Resources – finds and retains the highest level of talent at the firm.
 Infrastructure – includes the lawyers and risk managers whose oversight is
crucial to ensuring the client’s guidelines are followed, the investment risk
is controlled, and the firm is operating within the regulations established
by the SEC.