Environmental Appraisal Organizational Appraisal SWOT Analysis Porters Five Forces Model - Value Chain McKinsey 7s Framework Corporate Portfolio Analysis BCG and GE 9 cell
Environment of any organization is the aggregate of all conditions, events and influences that surrounds and affect it. Organization environment is divided into two parts – * External Environment * Internal Environment
It is complex It is dynamic It is multi-faceted It has a far-reaching impact The process of strategic formulation starts with, and depends on, the appraisal of the external and internal environment of organization
Opportunity – Favourable Conditions Threat – Unfavourable Conditions Strength – Inherent capacity of organization to gain strategic advantage Weakness – Inherent limitation or constraints which creates strategic disadvantage
All the organizations concern about relevant environment which focuses on the factors related to mission, purpose, objectives and strategies. Having identified its relevant environment, an organization can systematically appraise it and implement the result of such appraisal in strategic planning. The organization environment can be divided into different sectors depending upon size of organization, nature product, type of technology used etc. This division helpful in analyzing – appraising the environment.
Market Environment – It largely depends upon the type of industry structure. Some important factors and influences operating in this environment -1. Customer or Client factors2. Product factors3. Marketing intermediary factors4. Competitor related factors
Change in technology can create new market and new business segment. It can also change relative competitive cost position. Some important factors and influences operating in this environment -1. Sources of Technology2. Technological Development3. Impact of technology on people4. Communication and infrastructure in management
It consist of factors related to cost, reliability, availability of the factors of production or service. Some important factors and influences operating in this environment -1. Cost, availability and continuity of supply of raw materials and relative components2. Cost and availability of Finance3. Cost, reliability and availability of energy4. Cost, availability and dependability of workforce5. Cost, availability of and the existence of sources6. Infrastructural support
It consist of macro level factors related to the means of production and distribution of wealth Some important factors and influences operating in this environment -1. The economic stage of the country at given point2. The economic structure adopted3. Economic Policies4. Economic Planning5. Economic Indices i.e. national income, the balance of payments, rate of savings and investment etc.6. Infrastructural factors such as financial institutions, banks etc.
It consist of factors related to planning, promotion and regulation of economic activities by the government. Some important factors and influences operating in this environment -1. The constitutional frame work2. Policies related to licensing, foreign investment3. Policies related to distribution and pricing and control4. Policies related to imports and exports5. Other policies related to public sector, SSI, consumer protection etc.
It consist of factors related to the management of public affairs and their impact on the business of the organization. Some important factors and influences operating in this environment –1. The Political System and its feature2. The Political Structure, its goals and stability3. Political Processes4. Political Philosophy, government’s role etc.
It consist of factors related to human relationships within a society, shared behaviour of groups of human beings in the business Some important factors and influences operating in this environment -1. Demographic Characteristics2. Socio-cultural concern such as environmental pollution, consumerism etc.3. Socio-cultural attitudes and values4. Family structure and changes in it5. The role and position of me, women, children in family and society6. Educational levels, awareness and consciousness of rights, work ethics and attitude towards minority
It consist of all the factors that operate at cross-cultural, and across-the-border level. Some important factors and influences operating in this environment -1. Globalization, its process, its content and direction2. Global economic forces, organization3. Global trade and commerce, its process and trends4. Global Information System5. Global Technological and Quality systems and Standards6. Global Market and Competitiveness7. Global Legal System8. Global Human Resources9. Globalization of Management and allied disciplines10. Geopolitical Situation, Strategic interest of nations
The process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business is known as environmental scanning. It is necessary for strategy formulation of the orgnization
Factors considered for ES – Event, Trends, Issues, expectations Approaches to ES –1. Systematic Approach2. Ad hoc Approach3. Processed-form Approach Irrespective of approach is adopted for environmental scanning, data collection is necessary for driving information about environmental factors.
Documentary or Secondary sources of Information Mass Media like radio, television Internal Sources like company files and documents External Agencies like customers, suppliers, government agencies etc. Formal Studies conducted by consultant, educational institute etc. Spying and Surveillance through ex-employees of competitors
In order to have clear cut idea about opportunities and threats faced by organization at a given time, it is necessary to appraise the environment
Strategist-related factors – Education, motivation level, ability to withstand time pressure and strain, interpersonal relationship between the group, appraisal system etc. Organization-related factors – Organization size and complexity, nature of market, product and services provided by the organization Environmental-related factors – The nature of environment depends upon its complexity, volatility, hostility and diversity
An important factors can be identified by testing each factor w.r.to its impact on the business of the organization and probability of such impact. The issues or factors, which are critical, need to pay immediate attention should be given high priority while formulating the strategy of the organization
It is structured by the preparation of the environmental threats and opportunities profile (ETOP), which involves dividing the environment into different sectors and then analyzing the impact of each sector on the organization. The preparation of an ETOP provides the strategist with a clear picture of which sectors have a favorable impact on the organization.
An organizational appraisal enables a firm to decide about what it can do. The result of organizational appraisal are structured through the preparation of an organizational capability profile and a strategic advantage profile
Financial Capabilities – It relates to the availability, usages, and management of funds. Marketing Capabilities – It relates to the pricing, promotion, and distribution of product and services. Operation Capabilities – It relates to the production of products or services and the use of material resources.
Personal Capabilities – It is related to the existence and use of human resources and skills. Information Management Capabilities – It relate to the design and management of the flow of information from outside into and within, an organization for the purpose of decision making General management Capabilities – It relates to the integration, coordination, and direction of the functional capabilities towards the common goal.
It involves the factors that affects the appraisal, the approaches that can be adopted to appraise them, and the sources of information available to perform the appraisal. By appraising on organization, the strategists develop an assessment of its organizational capability to compete in the market.
The ability of strategists to comprehend complexity The size of the organizational – affects the quality of appraisal The nature of an organization and internal environment – its complexity and diversity
Internal Analysis – It consist of value chain analysis, quantitative analysis including financial and non financial analysis, and qualitative analysis. Comparative Analysis – It consist of techniques of historical analysis, industry norms, and benchmarking Comprehensive analysis – It is done through the methods of balanced scorecard and key factor rating.
The purpose of organizational appraisal is to determine the organizational capability in terms of strengths and weakness that lie in the different functional areas. It could be done by a detailed organizational capability profile (OCP) and summarized strategic advantages profile (SAP)
It is carried out to understand external as well as internal environment of the business firm. To form a effective strategy, it is necessary to match strengths and weaknesses with threats and opportunities of the organization. An effective organizational strategy is the one who capitalizes opportunities with help of strengths and neutralize threats by minimizing the impact of weaknesses.
This is a method for assessing the strengths and weaknesses of an organization on the basis of an understanding of the series of activities it performs. Porter is credited with introduction of the framework called ‘Value Chain’ (1985) A value chain is a set of interlinked value- creating activities performed by an organization.
These activity begins with procurement of basic raw materials, go through its processing in various stages, and continue right up to the end products finally marketed to the to the customer. Porter divided the value chain of manufacturing organization into primary and support activities.
Inbound Logistics – Scheduling, Warehouseing, Materials Handling, Inventory Control etc. Operations – Manufacturing, Packaging, Assembly, Maintenance etc. Outbound Logistics – Transportation, Order Processing etc. Service – After sale service, training
Procurement – Purchasing, Physical, Resources etc. Human Resource Development – Recruitment, Rewarding, Developing, Retrenchment etc, Technology Development – Equipping Assimilation Infrastructure – Organizational Design, Staff Functions
StructureStrategy Systems Shared Values Skills Style Staff
It is value based management that describes the way in which the organization operates based on the following factors.SHARED VALUES: The interconnecting center of Mckinsey’s model. This represents what does the organization stands for and what it believes in. [Beliefs, Attitudes]STATEGY: Plans for the allocation of a firms scare resources, overtime to reach identified goals. [Environment, Competition, Customers]
STRUCTURE: The way the organization’s units relates to each other. [Centralized, functional division (top-down), Decentralized (the trend in larger organization), Network, Holdings etc.]SYSTEM: The procedures, processes and routines that characterize how important work is to be done. [Financial systems, Hiring, Promotion, Performance Appraisal System, Information System]STAFF: Number and Types of personnel with in the organisation.
STYLE: Cultural style of the organization and how key managers behaves in achieving the organizational goals.SKILLS: Distinctive capabilities of personnel of the organization as a whole.
Potential threats from Firm’s which make substitute products or servicesSupplier’s bargaining Forces of Competition Buyer’s bargaining Power Created by rivalry Power Potential threats from Entry of new firm
According to Porter, a structural analysis of industries be made so that a firm is in a better position to identify its strengths and weaknesses. The five forces indicated in his model determine the intensity of industry competition and profitability.
1. Threats of new entrants – New entrants cause a comparatively lesser sales volume and lower the returns for all the firms in the industry. The chances that new entrants will enter into industry depends on two factors – the entry barriers to an industry and expected retaliation from existing firms. An entry barrier depends on Economy of scale, Capital requirements, Product differentiation, Access to the distribution channels and Government policies etc.
2. Forces of competitors created by rivalry – The desire to be the market leader or to corner a larger market share leads to rivalry among the competitors. The dimensions of such rivalry are – Competitive structures (size & diversity), Demand conditions, Exist barriers (consists of economic, emotional and strategic factors) etc. These factors determines the business strategies that a firm is likely to adopt.
3. Bargaining Power of Buyer – It constitutes the ability of the buyers, individually or collectively, to force a reduction in the prices of products or services, demand a higher quality or better service or to seek more value for existing firm or new entrants of an industry. A high buyer bargaining power constitute a negative feature for existing firms or new entrants. A low supplier bargaining power enables a firm to pass on cost increase to buyer or to make the buyers accept a lower quality of product and service at a higher price.
4. Bargaining Power of Supplier – It constitutes the ability of supplier, individually or collectively, to force an increase in the prices of products or services, or make the buyer to accept a lower quality product or service. A high supplier bargaining power constitute a negative feature for existing firms or new entrants. A low supplier bargaining power enables a firm to negotiate the price increases in its favour or to make the supplier offer higher quality at a lower price.
5. Threat of substitute products – It means apparently different product or service offer for satisfaction of same set of customer needs. The availability of close substitute constitute a negative competitive force in an industry. The level of price is restricted by the price of substitute. Hence the firm has to formulate their business strategies keeping in vies the intensity of competitive force arising out of the presence or absence of the threat of substitutes.
It provides a graphic representation for an organization to examine the different businesses in its portfolio on the basis of their relative market shares and industry growth rates. The four cells of BCG matrix termed as stars, cash cows, question marks (or problems children), and dogs. Each of these cells represents a particular type of businesses.
HIGH 20% STARS QUESTIONS 15%Industry MARKSGrowth 10%Rate CASH DOGS 5% COWS HIGH LOW Relative Market Share
Stars are high growth high market share business which may or may not be self sufficient in terms of cash flow. This call corresponds closely to the growth phase of the product life cycle. A company generally pursues an expansion strategy to establish a strong competitive position with regard to a ‘star’ business. Government still seek to determine the ‘star’ status of any industry in India. e.g. Petrochemicals, Electronics, Telecommunication industries
It indicate, the businesses which generate large amounts of cash but their growth rate is low. In terms of PLC, these businesses are at mature state which are reaping the benefits of experience curve. The cash generation exceeds the reinvestment that could profitably made into ‘cash cows’ The cash generated by ‘cash cows’ is reinvested in ‘ stars’ and ‘question marks’. Companies which are well-entrenched in an established market can enjoy the benefits of ‘cash cows’. e.g. Scooters for Bajaj Auto, Decorative paint for Asian Paints etc.
The businesses with high industry growth but low market share for a company are ‘ question marks’ or ‘problem children’. They require high amount of cash to maintain or gain market share. These are generally new products or services which have a good commercial potential. Based on the logic of the experience curve, indicates that the company obtaining an early lead can expect cost advantages and market leadership and can successfully create entry barriers. The list of ‘question marks’ industries keeps on changing with the changes in government policy and other environmental factors.
These businesses are related to slow-growth industries and where a company has a low relative market share. They neither generate nor require large amount of cash. In terms of PLC, the ‘dogs’ are products in late maturity or a declining stage. The experience curve for the company shows that it faces cost disadvantages owing to low market share. e.g. Jute, Cotton, Shipping Industries etc.
A BCG matrix offer a facility for visual examination of the portfolio of the businesses of a company. A disadvantages lies in basic assumptions – the growth rate of an industry is taken as an indicator of its attractiveness and its market share for profitability. Difficulties in measuring the respective market shares or deciding who are the market leaders. Simplistic approach
Based on efforts of GE (General Electric) company of US supported by the consulting firm McKinsey & Company. This matrix are grouped on the basis of low to high industry attractiveness, and weak to business strength.
Three zones of three cells each made, denoting different combination represented by green, yellow, and red colours. Green zone (go ahead) – indicates expansion strategies. The business in this zone attracts more investments. Yellow zone (wait & see) – indicates hold and maintain type of strategies aimed at stability and consolidation. Red zone (stop) – indicates the retrenchment strategies of divestment and liquidation or rebuilding approach for adopting turnaround strategies.
The vertical axis represents industry attractiveness, which is weighted composite ratings based on eight different factors. These different factors are: market size and growth rate, industry profit margin, competitive intensity, seasonality, cyclicality, economies of scale, technology and social, environmental, legal and human impacts. The horizontal axis represents business strength competitive position , which is again a weighted rating based on seven factors. These factors are: relative market share, profit margins, ability to compete on price and quality, knowledge of customer and market, competitive strengths and weaknesses, technological capability, and caliber of management
It offers an intermediate classification of medium and average ratings. It incorporates larger variety of strategic variable like the market share and industry size. It is a powerful analytical tool to channel corporate resources to businesses that combine medium to high industry attractiveness with average to strong business strengths/competitive position. Drawback is, it only provides broad strategic prescriptions rather that specific business strategy.