UNIT IIENVIRONMENTAL ANLYIS

Importance of Environmental AnalysisThe strategy that a company may adopt is influenced by the environment.An environmental analysis will help the company to anticipate various threats and opportunities.Along with evaluation of its current strategy a company must also know how its strategy will work in the future environment.

Importance of Environmental ScanningTo know the various factors which would be helpful in accomplishing the company objectives.To know the various factors that would threaten the survival and growth of a company.To know the various factors that would generate new opportunities.

Characteristics of EnvironmentComplex Union Carbide @ Bhopal.DynamicUncertainUncontrollable

Outcomes from External and Internal Environmental AnalysesExamine opportunities and threatsExamine unique resources, capabilities, and competencies (sustainable competitive advantage)

The Context of Internal AnalysisEffective analysis of a firms internal environment (learning what the firm can do ) requires:Nurturing an organizational setting in which experimentation and learning are expected and promotedUsing a global mind-setThinking of the firm as a bundle of heterogeneous resources and capabilities that can be used to create an exclusive market position

Components of Internal Analysis

Creating ValueBy exploiting their core competencies or competitive advantages, firms create valueValue is measured byA products performance characteristicsThe products attributes for which customers are willing to payFirms create value by innovatively bundling and leveraging their resources and capabilities

Creating Competitive AdvantageCore competencies, in combination with product-market positions, are the firms most important sources of competitive advantageCore competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies

The Challenge of Internal Analysis To develop and use core competencies, managers must haveCourageSelf-confidenceIntegrityThe capacity to deal with uncertainty and complexityA willingness to hold people (and themselves) accountable for their work

Resources, Capabilities and Core CompetenciesResourcesAre a firms assets, including people and the value of its brand nameRepresent inputs into a firms production process, such as:Capital equipmentSkills of employeesBrand namesFinancial resourcesTalented managers

Resources, Capabilities and Core CompetenciesResourcesTangible resourcesFinancial resourcesPhysical resourcesTechnological resourcesOrganizational resourcesIntangible resourcesHuman resourcesinnovation resourcesReputation resources

Resources, Capabilities and Core CompetenciesCapabilitiesThe foundation of many capabilities lies in:The unique skills and knowledge of a firms employeesThe functional expertise of those employeesCapabilities are often developed in specific functional areas or as part of a functional area

Defining Organizational CapabilitiesOrganizational Capabilities = firms capacity for undertaking a particular activity. (Grant)Distinctive Competence = things that an organization does particularly well relative to competitors. (Selznick)Core Competence = capabilities that are fundamental to a firms strategy and performance. (Hamel and Prahalad)

Examples of Firms Capabilities

Resources, Capabilities and Core CompetenciesCore CompetenciesActivities that a firm performs especially well compared to competitorsActivities through which the firm adds unique value to its goods or services over a long period of time

Building Sustainable Competitive AdvantageFour Criteria of Sustainable Competitive AdvantageValuableRareCostly to imitateNonsubstituable

The internal EnvironmentIt comprises of Value systemMission and ObjectivesManagement Structure and natureInternal relationshipsHuman ResourceCompany Image and Brand EquityR & D capabilityFinancial FactorsMarketing Factors

Analysis of the External EnvironmentsGeneral environmentFocused on the futureIndustry environmentFocused on factors and conditions influencing a firms profitability within an industryCompetitor environmentFocused on predicting the dynamics of competitors actions, responses and intentions

The General Environment: Segments and Elements

Industry EnvironmentThe set of factors directly influencing a firm and its competitive actions and competitive responsesThreat of new entrantsPower of suppliersPower of buyersThreat of product substitutesIntensity of rivalry among competitors

Competitor AnalysisGathering and interpreting information about all of the companies that the firm competes against.

2*Opportunities and ThreatsOpportunityA condition in the general environment that, if exploited, helps a company achieve strategic competitiveness.ThreatA condition in the general environment that may hinder a companys efforts to achieve strategic competitiveness.

2*Segments of the General EnvironmentThe Demographic SegmentPopulation sizeAge structureGeographic distributionEthnic mixIncome distribution

2*Segments of the General Environment (contd)The Economic SegmentInflation ratesInterest ratesTrade deficits or surplusesBudget deficits or surplusesPersonal savings rateGross domestic product

2*Segments of the General Environment (contd)The Political/Legal SegmentAntitrust lawsTaxation lawsDeregulation philosophiesLabor training lawsEducational philosophies and policies

Segments of the General Environment (contd)The Sociocultural SegmentWomen in the workplaceWorkforce diversityAttitudes about quality of worklifeConcerns about environmentShifts in work and career preferencesShifts in product and service preferences

2*Segments of the General Environment (contd)The Technological SegmentProduct innovationsApplications of knowledgeFocus on R&DNew technologies

2*Segments of the General Environment (contd)The Global SegmentImportant political eventsCritical global marketsNewly industrialized countriesDifferent cultural attributes

2*Industry Environment AnalysisIndustry DefinedA group of firms producing products that are close substitutes (ex: automotive, airline, grocery retail)Firms that influence one another Includes a rich mix of competitive strategies that companies use in achieving strategic competitiveness and above-average returns

Threat of New Entrants:Economies of scaleBrand LoyaltyCapital requirementsSwitching costsAccess to distribution channelsCost advantagesGovernment policyExpected retaliation

Barriers to EntryProduct differentiationUnique productsCustomer loyaltyProducts at competitive pricesCapital RequirementsPhysical facilitiesInventoriesMarketing activitiesAvailability of capitalSwitching CostsOne-time costs customers incur when they buy from a different supplierNew equipmentRetraining employeesPsychic costs of ending a relationshipAccess to Distribution ChannelsStocking or shelf spacePrice breaksCooperative advertising allowances

Barriers to Entry Cost Disadvantages Independent of ScaleProprietary product technologyFavorable access to raw materialsDesirable locationsGovernment policyLicensing and permit requirementsDeregulation of industriesExpected retaliationResponses by existing competitors may depend on a firms present stake in the industry (available business options)

Bargaining Power of SuppliersSupplier power increases when:Suppliers are large and few in number.Suitable substitute products are not available.Individual buyers are not large customers of suppliers and there are many of them.Suppliers goods are critical to the buyers marketplace success.Suppliers products create high switching costs.Suppliers pose a threat to integrate forward into buyers industry.

Bargaining Power of BuyersBuyer power increases when:Buyers are large and few in number.Buyers purchase a large portion of an industrys total output.Buyers purchases are a significant portion of a suppliers annual revenues.Buyers switching costs are low.Buyers can pose threat to integrate backward into the sellers industry.

Threat of Substitute ProductsThe threat of substitute products increases when:Buyers face few switching costs.The substitute products price is lower.Substitute products quality and performance are equal to or greater than the existing product.Differentiated industry products that are valued by customers reduce this threat.

Intensity of Rivalry Among CompetitorsIndustry rivalry increases when:There are numerous or equally balanced competitors.Industry growth slows or declines.There are high fixed costs or high storage costs.There is a lack of differentiation opportunities or low switching costs.When the strategic stakes are high.When high exit barriers prevent competitors from leaving the industry.

A Porter's 5 forces analysis on Nokia

Threat of new entrants: The threat of a new entrant is quite low as the industry is already established.Technology is the major differentiator.Major barrier is high investments in R&D, technology and marketing.Nokia holds 29% of the market share in the industry, the highest market share in the industry and it need not worry about new entrants.

A Porter's 5 forces analysis on Nokia

Power of suppliers: As the leading mobile phone company in the industry they were in a very strong position when bargaining with their suppliers.Can bargain and negotiate with any mobile phone hardware maker because there is a high number of equipment suppliers.The software suppliers for their Smartphones are now Microsoft, who will have a very high bargaining power.There is a moderate threat from the powers of suppliers.

A Porter's 5 forces analysis on Nokia

Powers of buyers: The power that customers have is rising because of the increasing number of choices in the mobile telecommunication industry.The industry is very price sensitive with customers seeking out the best value for money.Many of the consumers will also be tied into long term contracts so switching from one handset to another will be difficult and expensive for the consumer, as a result they may not want to change until the contract is finished.Buyers have a high amount of power because of the other handsets they can purchase instead of Nokia

A Porter's 5 forces analysis on Nokia

Threats of substitutes productsHard to replace, as customers would not be able to be in constant contact when away from the house.On the other hand, it could be said that customers would be able to contact people through others types of media such as social networking websites, email and home telephones. Although staying in constant contact would be hard in customers day to day life.However, smart phones are capable of a lot of functions so there are many substitutes if the substitute focuses on one of the functions, e.g. digital camera can take better photos then smart phones, notebooks can surf the web just as effectively as smart phone can.Threat of a substitute product is very low due to the fact a mobile phone is no longer just for making calls but for all the other function as well

A Porter's 5 forces analysis on Nokia

Competitive rivalry: Nokia rivals have moved to smart phones and androids while Nokia have only just recently released their first smart phones leaving them trailing their rivals such as Apple and HTC.There is also very little differentiation between the competitors which means any new smart phones in the market, like Nokia Lumia, will find it difficult to tempt existing iphone and HTC customers to switch.Intense competition from large companies such as; Apple, HTC, Blackberry, Sony Ericcson and LG, ect.Competitive rivalry is very high and Nokia must be aware of the threat that competitors have on their business

Competitor Analysis

In formulating business strategy, managers must consider the strategies of the firm's competitors.The goal of competitor analysis is to understand:with which competitors to compete,competitors' strategies and planned actions,how competitors might react to a firm's actions,how to influence competitor behavior to the firm's own advantage.Competitor analysis has two primary activities, Obtaining information about important competitors, and Using that information to predict competitor behavior.

Primary Sources of Competitor information

Secondary Sources of Competitor Information

Competitor Analysis Framework

Michael Porter presented a framework for analyzing competitors. This framework is based on the following four key aspects of a competitor:Competitor's objectives.Competitor's assumptions.Competitor's strategy.Competitor's capabilities.

Competitor Analysis Framework

GlobalizationGlobalization refers to the strategy of approaching worldwide markets with standardized productsAwareness of the strategic opportunities faced by global corporations and of the threats posed to them is important to strategic planners Understanding the scope of competing in global markets is rapidly becoming a required competence of strategic managers

*Multidomestic and Global IndustriesA global industry is one in which competition crosses national borders (tires, athletic shoes)A multidomestic industry competition is essentially segmented from country to country (food retailing)

Projected Economic Growth

Why Firms Globalize?Earning high returns from transferring distinctive competencies to foreign marketsRealizing location economies by using lower-cost locations The resulting lost opportunities, reduced income, and limited productionMoving down the experience curve- Larger global markets = more accumulated volumeQuestion: Should firms be proactive or reactive?

At the Start of GlobalizationExternal and internal assessments are conducted before a firm enters global marketsExternal assessment involves careful examination of critical features of the global environmentInternal assessment involves identification of the basic strengths of a firms operations

Complexity of the Global EnvironmentFactors affecting the increasing complexity of global strategic planning:Multiple political, economic, legal, social, and cultural environmentsInteractions between the national and foreign environments are complexGeographic separation, cultural and national differences, and variations in business practices all tend to make communication and control efforts difficult Extreme competition

4 Strategic Choices Globally International strategyCreate value by transferring skills and products abroad. Multidomestic strategyMaximize local responsiveness by customizing products and marketing strategy for local markets. Global strategyPursue low-cost status, offer standardized global products. Transnational strategyUse global learning to achieve low-cost status, differentiation, and local responsiveness simultaneously.

The Advantages and Disadvantages of Different Strategies for Competing Globally

StrategyAdvantagesDisadvantagesInternationalTransfer of distinctive competencies to foreign marketsLack of local responsivenessInability to realize location economiesFailure to exploit experience-curve effectsMulti domesticAbility to customize product offerings and marketing in accordance with local responsivenessInability to realize location economiesFailure to exploit experience-curve effectsFailure to transfer distinctive competencies to foreign marketsGlobalAbility to exploit experience-curve effectsAbility to exploit location economiesLack of local responsiveness

TransnationalAbility to exploit experience-curve effectsAbility to exploit location economiesAbility to customize product offerings and marketing in accordance with local responsivenessReaping benefits of global learningDifficulties in implementation because of organizational problems

Four Basic Strategies

Escalating Commitments to International Markets

Environmental scanningEnvironmental scanning can be defined as the study and interpretation of the political, economic, social and technological events and trends which influence a business, an industry or even a total market.

Environment scanning v/s Environment analysisEnvironment "scanning" means to collect data about a given environment. Environment "analysis" means to analyze or "make sense of" the data that was collected during the scanning phase.Environmental scanning is one component of the environmental analysis.

Environmental ScanningThe screening of large amounts of information to anticipate and interpret change in the environment.Environmental scanning is the process of gathering information about events and their relationships within an organization's internal and external environments. Information has two primary strategic role - in objective setting and in strategy formulation The basic purpose of environmental scanning is to help management determine the future direction of the organization.They scan in order to avoid surprises, identify threats and opportunities, gain competitive advantage, and improve long-term and short-term planning

Environmental ScanningCompetitor IntelligenceThe process of gathering information about competitorswho they are?; what are they doing?Is not spying but rather careful attention to readily accessible information from employees, customers, suppliers, the Internet, and competitors themselves.May involve reverse engineering of competing products to discover technical innovations.Global ScanningScreening a broad scope of information on global forces that might affect the organization.Important to firms with significant global interests.

Assessing the Environment ForecastingThe part of organizational planning that involves creating predictions of outcomes based on information gathered by environmental scanning.Facilitates managerial decision making.Is most accurate in stable environments.

Assessing the Environment (contd)Types of ForecastingQuantitative forecastingApplying a set of mathematical rules to a series of hard data to predict outcomes (e.g., units to be produced).Qualitative forecastingUsing expert judgments and opinions to predict less than precise outcomes (e.g., direction of the economy).

Forecasting TechniquesVarious techniques are used to forecast future:Extrapolation is extension of present trends into the future. Brainstorming is qualitative approach requiring simply the presence of people with some knowledge if the situation to be predicted. Expert opinion is qualitative technique in which experts in a particular area attempt to forecast likely developments. Delphi technique in which separated experts independently assess the like hoods of special events. These assessments are combined and sent back to each expert for fine tuning until an agreement is reached. Statistical modeling is a quantitative technique that attempts to discover casual or at least explanatory factors that link two or more time series together. Scenario writing is focused descriptions of different likely future presented in a narrative fashion

ETOP Analysis

Economic Environment Analysis This includes the countriesEconomic conditionEconomic policiesStages of developmentPer capita incomeNature of economyInterest rate and inflation rateLabour CostBusiness Cycle stageEfficiency of Financial Markets

Legal Environment AnalysisPolitical/Legal segment seriously influence the nature of competition and the profitability of the industries.For Ex. Tax levied on electronic items.Permits and Permissions.Import and Export controlsConfronting with Laws and Regulations (Health, Safety etc)Regulatory frameworks have played an enabling role for globalisation.Governments are working together at international level in imposing legislative controls (Ex. Global Warming)The agreements between two countries at international level and the union of the countries producing one type of product affect notably economic activities

Analysis of Competitive CapabilitiesCompetitive capabilityStrategic Capability/Competitive capability of an organisation is its ability to survive in the marketplace.The base for the strategic capability is the organisations ability to differentiate itself from others who are offering similar products.Why it is Important?The strategic capability is necessary to cope with the changes in the environment and to gain competitive advantage.The organisation should have the internal capability of using its resources and core competencies in overcoming the threats and exploiting the opportunities.

Analysis of Competitive CapabilitiesThe Strategic Capability can be related to 3 main factorsWhether the organisation has the necessary resources to deliver a new strategy.Identifying competencies in relevant areas i.e. availability of the expertise and knowledge within the organisationTo have an understand whether or not the organisation has the capacity to implement and manage the change.The Organisation capability could be itsFinancial CapabilityMarketing CapabilityTechnological CapabilityHuman Resource Capability

Difference between SWOT and TOWS TOWS analysis isvery similar to the SWOT method.It is the next level of SWOT.TOWS simply looks at the negative factors first in order to turn them into positive factors.It was propounded by Heinz Weihrich in 1982.Today this model has been used for research and strategy formulation around the globe.2*

TOWS Matrix

InternalFactorsExternalFactorsStrengths(list key strengths)Weaknesses(list key weaknesses)Opportunities(list key opportunities)SO Strategies: strategies that use strengths to take advantage of opportunities(Maxi Maxi)WO Strategies: strategies that reduce weaknesses & take advantage of opportunities(Mini Maxi)Threats(list key threats)ST Strategies: strategies that use strengths to overcome threats( Maxi Mini)WT Strategies: strategies that reduce weaknesses and overcome threats( Mini Mini)

TOWS MatrixSO StrategiesSeeks to mass-up firms strengths to exploit the opportunities. ( Ex. HUL)ST StrategiesAttempts use the firms strengths to deal with environmental threats. ( Ex. HUL)WO StrategiesAims at minimising the weakness and maximising the opportunities. (Ex. Raymond's dependence for technology)WT StrategiesTries to minimise weaknesses and threats.For Ex. Managerial weakness can be minimised by training & external threat can be met by Strategic alliances.

2*

*Identifying the Competitive Advantage Competitive AdvantageA firms profitability is greater than the average profitability for all firms in its industry. Sustained Competitive AdvantageA firm maintains above average and superior profitability and profit growth for a number of years.The Primary Objective of Strategyis to achieve a Sustained Competitive Advantagewhich in turn results in Superior Profit and Profit Growth.

*Strategy, Resources, Capabilities & Competencies

*Competitive Advantage, Value Creation, and Profitability

VALUE or UTILITY the customer gets from owning the productPRICE that a company charges for its productsCOSTS of creating those productsConsumer surplus is the excess utility a consumer captures beyond the price paid.Basic Principle: the more utility that consumers get from a companys products or services, the more pricing options the company has.How profitable a company becomes depends on three basic factors:

*Building Blocks of Competitive AdvantageThe Generic Distinctive Competencies Allow a company to: Differentiate product offering Offer more utility to customer Lower the cost structure regardless of the industry, its products, or its services

* EfficiencyMeasured by the quantity of inputs it takes to produce a given output: Efficiency = Outputs / InputsProductivity leads to greater efficiency and lower costs:Employee productivityCapital productivitySuperior efficiency helps a company attain a competitive advantage through a lower cost structure.

* QualityReliable and Differentiated by attributes that customers perceive to have higher value The impact of quality on competitive advantage:High-quality products differentiate and increase the value of the products in customers eyes.Greater efficiency and lower unit costs are associated with reliable products.Superior quality = customer perception of greater value in a products attributesForm, features, performance, durability, reliability, style, designQuality products are goods and services that are:

*A Quality Map for AutomobilesWhen customers evaluate the quality of a product, they commonly measure it against two kinds of attributes:

1. Quality as Excellence

2. Quality as Reliability

* Innovation Innovation is the act of creating new products or new processesProduct innovationCreates products that customers perceive as more valuable and Increases the companys pricing optionsProcess innovationCreates value by lowering production costs

Successful innovation can be a major source of competitive advantage by giving a company something unique, something its competitors lack.

* Responsiveness to Customers

Superior quality and innovation are integral to superior responsiveness to customers.Customizing goods and services to the unique demands of individual customers or customer groups.Enhanced customer responsiveness Customer response time, design, service, after-sales service and support

Superior responsiveness to customers differentiates a companys products and services and leads to brand loyalty and premium pricing.Identifying and satisfying customers needs better than the competitors

*The Durability of Competitive AdvantageBarriers to ImitationMaking it difficult to copy a companys distinctive competenciesImitating ResourcesImitating CapabilitiesCapability of CompetitorsStrategic commitment Commitment to a particular way of doing businessAbsorptive capacityAbility to identify, value, assimilate, and use knowledgeIndustry DynamismAbility of an industry to change rapidlyThe DURABILITY of a companys competitive advantage over its competitors depends on:Competitors are also seeking to develop distinctive competencies that will give them a competitive edge.

*Why Companies Fail InertiaCompanies find it difficult to change their strategies and structures Prior Strategic CommitmentsLimit a companys ability to imitate and cause competitive disadvantage The Icarus ParadoxA company can become so specialized and inner directed based on past success that it loses sight of market realitiesWhen a company loses its competitive advantage, its profitability falls below that of the industry. It loses the ability to attract and generate resources. Profit margins and invested capital shrink rapidly.

*Comparing Toyota and General MotorsSuperior value creation requires that the gap between perceived utility (U) and costs of production (C) be greater than that obtained by competitors.

The Value ChainCompetitive advantage is created and sustained only when a firm is able to perform the most critical functions either more cheaply or better than its competitors Michael Porter.The concept was first described and popularized by Michael Porter in 1985.Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced").It helps the managers to find the strengths and weaknesses of each activity of the firm and its competitors.

*The Value ChainA company is a chain of activities for transforming inputs into outputs that customers value including the primary and support activities.

Primary value chain activities

Primary ActivityDescriptionInbound logisticsAll those activities concerned with receiving and storing externally sourced materialsOperationsThe manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products)Outbound logisticsAll those activities associated with getting finished goods and services to buyersMarketing and salesEssentially an information activity - informing buyers and consumers about products and services (benefits, use, price etc.)ServiceAll those activities associated with maintaining product performance after the product has been sold

Support activities

Secondary ActivityDescriptionProcurement This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers)Human Resource ManagementThose activities concerned with recruiting, developing, motivating and rewarding the workforce of a businessTechnology Development Activities concerned with managing information processing and the development and protection of "knowledge" in a businessInfrastructure Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management

Guidelines for crafting successful business strategiesPlace top priority on crafting and executing strategic moves that enhance the companys competitive position for the long term.Be prompt in adapting to changing market conditions, unmet customer needs, buyer wishes for something better, emerging technological alternatives and new initiatives of competitors.Invest in creating a sustainable competitive advantage.

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