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Unit 2 environmental analysis

Strategic Management

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Unit 2 environmental analysis

  1. 1. A A A A A A N U B A J R A C H A R Y A L E C T U R E R O F S T R A T E G I C M A N A G E M E N T I B & M S C O L L E G E
  2. 2. Environmental Analysis Agenda Environmental Analysis:-  Introduction  Need & Importance of Environmental Analysis  Process of Environmental Analysis  Limitations of Environment Analysis  Levels of Environmental Analysis
  3. 3. Environmental Scanning Agenda Environmental Scanning:- Introduction Features of Environmental Scanning Procedure of Environmental Scanning Approaches to Environmental Scanning Techniques of Environmental Scanning
  4. 4. Forecasting Agenda Forecasting:-  Definition of Forecasting  Features of Forecasting  Process of Forecasting  Techniques of Forecasting Criteria of Good Forecasting Technique
  5. 5. Internal Analysis Agenda Internal Analysis:-  Introduction  Dynamics of Internal Analysis Approaches/Methods of Internal Analysis  SWOT Analysis
  6. 6. Environmental Analysis Environmental Analysis is described as the process which examines all the components, internal or external, that has an influence on the performance of the organization. The internal components indicate the strengths and weakness of the business entity whereas the external components represent the opportunities and threats outside the organization.
  7. 7. Environmental Analysis Finally, the environmental analysis is awareness of the organizations to the success.
  8. 8. Need & Importance of Environmental Analysis They help the managers to achieve the organizational objectives effectively than other organizations. An enterprise cannot achieve its objectives unless it adapts itself to Environmental change. Systematic analysis enables the managers to predict the future and to have enough time for other activities. This minimizes the time pressure of the managers
  9. 9. Process of Environmental Analysis 1. Identifying Environmental Factors: First of all, the factors which influence the business entity are to be identified, to improve its position in the market. The identification is performed at various levels, i.e. company level, market level, national level and global level. 2. Scanning and Selecting Relevant and key factors: Scanning implies the process of critically examining the factors that highly influence the business, as all the factors identified in the previous step effects the entity with the same intensity. 3. Defining variables for Analysis: In this step, a careful analysis of all the environmental factors is made to determine their effect on different business levels and on the business as a whole. Different tools available for the analysis include benchmarking, Delphi technique and scenario building.
  10. 10. Contd…. 4. Using different Methods, Techniques, and Tools: Some of the methods are Scenario Building, Benchmarking, and Network Methods. Some of the techniques are Brainstorming, survey, Historical enquiry. Some of the analytical tools are Mean, Median, Mode, Frequency. 5. Forecasting Environmental Factors: After identification, examination and analysis, lastly the impact of the variables is to be forecasted. 6. Designing Profiles: Internal areas are recorded in Strategic Advantages Profile (SAP), and External areas are recorded in Environmental Threat and Opportunity Profile (ETOP). These two Profiles are designed & combined in to one. 7. Strategic Position and Reporting Writing: After analysis of business environment a strategist knows the actual situation and can make some future forecasting based on the Environmental Analysis.
  11. 11. Limitations of Environmental Analysis Environmental analysis suffers from certain limitations also. These limitations are as follows: 1. Lack of Forewarning of Unforeseen Events: Environmental analysis does not predict the future. It does not eliminate uncertainty for the organization also. 2. No Assurance as to Organization Effectiveness: Environmental analysis does not ensure organizational effectiveness. It acts only as inputs in strategy development and testing.
  12. 12. Contd…… 3. Not fully Reliable: Normally, people place too much reliance on the information collected through environmental scanning. But in practice, it is not so. When there is overloading of information, one is likely to get confused. 4. Absence of Strategic Approach: Success of any organization lies in adventure and strategic risk-taking. So this analysis should be strategically done.
  13. 13. Levels of Environmental Analysis I. Macro External Environment Analysis (General or Remote level environment): These components offer opportunities and threat for the firm. Its Components are Economic, Political, Social, Technological & International. II. Micro Internal Environment Analysis (Operating Level ): Its factors include Competition, Supplier, Customer, Channels & Manpower. There are two levels: a) Industry Analysis b) Competitive Analysis III. Firm Level Internal Analysis: The factors of this level of environment include functional management such as Organizational, personnel, Marketing, Production & Financial Components.
  14. 14. Environmental Scanning Environmental scanning is the process of gathering information about events and their relationships within an organization's internal and external environments. Environmental scanning is a process of gathering, analyzing, and dispensing information for tactical or strategic purposes.
  15. 15. Features Holistic Exercise:- EA is a holistic exercise in which total view of environment is taken. Heuristic or Exploratory Process:- While the monitoring aspect of the environments is concerned with present developments, a large, part of the process seeks to explore the unknown area. Continuous Process:- EA must be a continuous process rather than being an starting scanning system.
  16. 16. Importance of Environmental Scanning: A. Customer needs: It signals an organization to the changing needs and requirements of the customers. B. Capitalize opportunities: It helps an organization to capitalize opportunities earlier than the competitors. C. Qualitative information: It provides a base of objective qualitative information about the environment that can be utilized for strategic management. D. Intellectual simulation: It provides intellectual stimulation to managers in their decision making. E. Image: It improves the image of the organization as being sensitive and responsive to its environment.
  17. 17. Procedure of Environmental Scanning  Environmental scanning is a useful managerial tool for assessing the environmental trend. The following process is adopted for environmental scanning:- 1) Study the forces and Nature of the Environment: In the first step of environmental scanning, the forces of the environment that have got significant bearing in the growth and development of the business should be identified. They may be political, economic, sociology-cultural, technological, legal, physical environment and global components. 2) Determine the sources of Information: After studying the process and nature of the environment, the sources of collecting information from the environment should be determined. 3) Audit Environmental Influences 4) Identify key competitive forces through structural Analysis 5) Identify Strategic Position 6) Identify key opportunities & Threats
  18. 18. Approaches To Environmental Scanning 1. Systematic approach: Under this approach, a systematic method is adopted for environmental scanning. The information regarding market and customer, government policy, economic and social aspects are continuously collected. In other words, the environment is monitored in a regular way. 2. Ad-hoc Approach: Under this, specific environmental components are only analyzed through survey and study. Ad-hoc approach is useful for collecting information for specific project, evaluating the strategic alternative or formulating new strategies. It is not a continuous process. 3. Processed form approach: Under this, the information collected from internal and external sources are used after processing them. Normally, the information obtained from secondary sources are processed and used as per the requirements of the business. 4. Scan and Assess the Trend: This is the final step of environmental scanning process. It involves a detailed and micro study of the environment to identify the early signals of potential changes in the environment.
  19. 19. Techniques of Environmental Scanning 1. SWOT Analyses : Strength & weakness are determine by internal analysis whereas opportunities & threats are determine by external analysis. Strengths: characteristics of the business or project that give it an advantage over others. Weaknesses: are characteristics that place the team at a disadvantage relative to others. Opportunities: elements that the project could exploit to its advantage. Threats: elements in the environment that could cause trouble for the business or project.
  20. 20. Techniques of Environmental Scanning 2. ETOP Analyses: ETOP stands for Environmental threat & opportunity profile. Importance of ETOP: 1. Provide clear picture to the strategist about the sectors & factors in these sectors which may have favorable impact on the organization. 2.It help an organization in formulating an appropriate strategy to take advantage of opportunity & threats to the business. 3. Spying: To try secretly to get information about a organization. 4. Ratio analysis 5. Interpolation & Extrapolation: To estimate values of data or a function between two known values. To make an estimate about something from known facts.
  21. 21. Techniques of Environmental Scanning 3. QUEST: Quick Environmental Scanning Technique as proposed by B Nanus. It is a scanning procedure designed to assist executives and planners to keep changes things that are next to each other in a line. Process of Quest: 1. Preparation 2. Environmental Scanning Workshop 3. Intermediate Analysis & Report 4. Strategic options workshop & follow-up 4. PEST: PEST stands for “political, economic, social & technological” and describes a framework of macro- environmental factors used in the environmental scanning component of strategic management.
  22. 22. Forecasting Forecasting is the process of predicting the future. Whether it is predicting future demand, sales, or production, forecasting is an important yet unavoidable task that is an internal part of the most all business activities. Forecasting is a systematic guessing of the future course of events.  Forecasting provides a basis for a planning.  Forecasting is an operational research technique used as a basis for management planning and decision making.
  23. 23. Characteristics 1. It is concerned with future events. 2. It is necessary for planning process. 3. The impact of future events has to be considered in the planning process. 4. It is a guessing of future events. 5. It considers all the factors which affect organizational functions. 6. Personal observation also helps forecasting.
  24. 24. Process of Forecasting 1. Thorough preparation of foundation:- The very purpose of thorough preparation of a foundation is that the forecasting is based on the foundation. 2. Estimation of Future:- The brightness of future period can be estimated in consultation with the key personnel & it may be communicated to all the employees of the business unit. 3. Collection of Results:- Relevant records are prepared & maintained to collect the result. 4. Comparison of Results:- The actual results are compared with estimated results to know deviations. This will help the management to estimate the future. 5. Refining of Forecast:- The forecast can be refined in the light of deviations which seem to be more realistic.
  25. 25. Techniques of Forecasting  Qualitative Techniques/Opinion Poling Method: 1. Consumer Survey Methods:- Most direct method of forecasting demand in the short-run. Surveys are conducted to collect information about future purchase plans of the probable buyers of the product. It includes: a) Complete Enumeration Survey b) Sample Survey and test Marketing c) End-use method 2. Sales Force opinion methods: (Collective opinion methods) Field survey can be conducted to collect information regarding the attitude of people.
  26. 26. Contd…. 3. Delphi Technique: (Expert opinion methods) Rand corporation has developed the Delphi method initially in 1969 to forecast the military events. Then, it has been applied in other areas also. Delphi method is useful when past data are not available and where the past data don’t give an indication for the future events.
  27. 27. Techniques of Forecasting  Quantitative Techniques/Statistical or Analytical Methods: 1. Trend Projection Method: An old firm can use its own data of the past years regarding its sales in sales in past years. The following methods are:- A. Graphical Method B. Least square Method C. Time series data D. Moving average data E. Exponential Smoothing
  28. 28. Contd…. 2. Barometric Method:- Index numbers are used to measure the state of condition of business condition between two or more periods. Business trend, seasonal fluctuations of a business and cyclical movements are studied with the help of index numbers. 3. Regression Method:- Regression analysis is used to find out the effect of changes of the relative movements of two or more inter-related variables. 4. Econometric Method
  29. 29. Importance of Forecasting 1. Promotion of Business 2. Key to planning 3. Co-ordination 4. Control 5. Success in Organization 6. Achieving Objectives 7. Improving the quality of General Management 8. Helping every Aspect
  30. 30. Dynamics of Internal Analysis Resources Organizational Behavior Strength & Weaknesses Capabilities: Capability is the inherent capacity or potential for an Organization to use its strengths and overcome its weaknesses in order to exploit the opportunities & face the threats in its external environment. Synergistic Effects Competencies Competitive Advantage (Strategic Advantage/Competitive Advantage/Distinctive competitiveness)
  31. 31. Approaches/ Methods Of internal Analysis 1. Value chain Analysis 2. Functional Analysis 3. Grid Approach 4. Quantitative Analysis 5. Qualitative Analysis 6. Benchmarking 7. Balanced Scorecard
  33. 33. What is the value chain?  Porter’s definition includes all activities to design, produce, market, deliver, and support the product/service.  The value chain is concentrating on the activities starting with raw materials till the conversion into final goods or services.  Two categories: I. Primary Activities (operations, distribution, sales) II. Support Activities (R&D, Human Resources)
  34. 34. What is value chain analysis? Used to identify sources of competitive advantage Specifically: a) Opportunities to secure cost advantages b) Opportunities to create product/service c) differentiation d) Includes the value-creating activities of all industry participants
  35. 35.  TYPES OF FIRM ACTIVITIES Primary activities:  Those that are involved in the creation, sale and transfer of products (including after-sales service)  Inbound logistics  Operations  Outbound logistics  Sales and marketing  Service and support Support Activities:  Those that merely support the primary activities: a) Human resources (general and admin.) b) Tech. development c) Procurement
  37. 37.  SUPPORT ACTIVITIES: FIRM INFRASTRUCTURE  The activities such as Organization structure, control system, company culture are categorized under firm infrastructure. HUMAN RESOURCE MANAGEMENT  Involved in recruiting, hiring, training, development and compensation. TECHNOLOGY DEVELOPMENT  These activities are intended to improve the product and the process, can occur in many parts of the firm. PROCUREMENT  Concerned with the tasks of purchasing inputs such as raw materials, equipment, and even labor.
  38. 38. Functional Analysis One of the simplest ways to scan & analyze an organization’s internal environment is through functional analysis. Types of Areas in Functional Analysis: A. Production Function B. Marketing Function C. HR Function D. Financial Function E. R&D Function F. Operations Function
  39. 39. Grid Approach  Grid’s Approach to SM helps to address fundamental issues related to business direction, defining the options to get there, & the allocation of resources to achieve these goals.
  40. 40. Quantitative Analysis I. Financial Analysis: It is vey popular method used by all those involved in investment decisions like Entrepreneurs, managers, shareholders, & financiers. The prime objective of this analysis is to assess the financial health of the organization. Three main methods in financial analysis: 1. Ratio Analysis 2. Economic Value-Added (EVA) Analysis 3. Activity-based cost (ABC) Accounting
  41. 41. Quantitative Analysis 2. Non-financial Analysis: Can't be best expressed in monetary units. E.g of non-financial quantitative measures are: a) Employee turnover b) Absenteeism c) Market ranking d) Rate of advertising recall e) Service call-rate f) Inventory units used per period
  42. 42. Qualitative Analysis Many of the Strengths & Weaknesses of an organization can’t be expressed in quantitative terms. Qualitative analysis can also effectively supplement quantitative analysis. Quantitative analysis is considered as ‘soft’ as compared to the ‘hard’ analysis based on numbers.
  43. 43. Importance A. Understand Cost:- e.g-which one is least profitable & how one might reduce fixed/variable cost B. Improve working practice:- e.g- by planting new varieties of plants to supply different markets. C. Understand Business Drivers:- Business drivers are local groups that can share ideas & information, based on benchmarking. D. Improve Quality:- Improvement in the quality of the product/services.
  44. 44. What is a Balanced Scorecard?  The Balanced Scorecard is a strategic planning and management system that organizations use to: 1. Communicate what they are trying to accomplish. 2. Align the day-to-day work that everyone is doing with strategy. 3. Prioritize projects, products, and services. 4. Measure and monitor progress towards strategic targets.
  45. 45. Balanced Scorecard Concept  Was first published in 1992 by Robert Kaplan and David Norton, a book followed in 1996.  The approach is to provide 'balance' to the financial perspective.  The system connects the dots between big picture strategy elements such as mission (our purpose), vision (what we aspire for), core values (what we believe in), strategic focus areas (themes, results and/or goals) and  the more operational elements such as objectives (continuous improvement activities), measures (or key performance indicators, or KPIs, which track strategic performance), targets (our desired level of performance), and initiatives (projects that help you reach your targets).
  46. 46. Why Use a Balanced Scorecard? Improve organizational performance by measuring matters Increase focus on strategy and results Align organization strategy with workers on a day-to- day basis Focus on the drivers key to future performance Improve communication of the organization’s Vision and Strategy Prioritize Projects / Initiatives
  47. 47. 4 Business Perspectives The Balanced Scorecard model suggests that we view the organization from 4 perspectives. Then Develop metrics, collect data and analyze it relative to each of these perspectives
  48. 48. 4 Business Perspectives Questions Financial perspective  Strategic question:  “To succeed financially, how should we appear to our shareholders?”  Examples (measurable indicators):-  Cash flow  Sales growth  Operating income  Return on Equity (RoE)  Return On Investment (ROI)  Return on Capital Employed (RoCE)  Financial Results (Quarterly/Yearly)  Value Outcome:-  Financial performance/profitability
  49. 49. Customer Perspective  Strategic question:  “To achieve our vision, how should we appear to our customers?”  Examples (measurable indicators):  Percent of sales from new products  On time delivery  Share of important customers’ purchases  Ranking by important customers  Delivery performance to customer  Quality performance for customer  Customer satisfaction rate  Customer percentage of market  Customer retention rate  Value Outcome:  Customer satisfaction
  50. 50.  Business (internal) process perspective  Strategic question:  “To satisfy our shareholders and customers, what business processes must we excel at?”  Examples (measurable indicators):  Cycle time  Unit cost  New product introductions  Number of activities per function  Duplicate activities across functions  Process alignment (is the right process in the right department?)  Process automation  Value Outcome:  Efficiency
  51. 51. Learning innovation and Growth perspective Strategic question:  “To achieve our vision, how will sustain our ability to change and improve?” Examples (measurable indicators):  Time to develop new generation of products  Life cycle to product maturity  Time to market versus competition  Is there the correct level of expertise for the job?  Employee turnover  Job satisfaction  Training/Learning opportunities Value Outcome:  Organizational knowledge and growth capacity
  52. 52. Balanced Scorecard Measurement
  53. 53. What is SWOT Analysis? Concept A technique that enables a group or individual to move from everyday problems and traditional strategies to a fresh prospective. SWOT analysis looks at your strengths and weaknesses, and the opportunities and threats your business faces.  The SWOT Analysis framework is a very important and useful tool to use in marketing Management and other business applications.  As a basic tool its mastery is a fundamental requirement for the marketer, entrepreneur or business person.
  54. 54. Strengths Strengths Strengths Strengths Strengths Strengths Strengths SWOT Analysi s What is SWOT Analysis? Technique is credited to Albert Humphrey who led a research project at Stanford University in the 1960s and 1970s. Strengths Planning tool used to understand Strengths, Weaknesses, Opportunities, & Threats involved in a project / Opportunity Weakness business. Used as framework for organizing and using data and information gained from situation analysis of internal and external Threats environment.
  55. 55. What is SWOT Analysis? STRENGTHSSTRENGTHS STRENGTHS Characteristics of the business or a team that give it an advantage over others in the industry. Beneficial aspects of the organization or the capabilities of an organization, process capabilities, financial resources, products and services, customer goodwill and brand loyalty. Examples - Abundant financial resources, Well-known brand name, Lower costs [raw materials or processes], Superior management talent, Better marketing skills, Good distribution skills, Committed employees
  56. 56. WEAKNESSES What is SWOT Analysis? Characteristics that place the firm at a disadvantage relative to others. Detract the organization from its ability to attain the core goal and influence its growth. Weaknesses are the factors which do not meet the standards we feel they should meet. However, weaknesses are controllable. They must be minimized and eliminated. Examples - Limited financial resources, Weak spending on R & D, Very narrow product line, Limited distribution, Higher costs, Out-of- date products / technology, Weak market image, Poor marketing skills, Limited management skills, Under- trained employees.
  57. 57. What is SWOT Analysis? OPPORTUNITIES: 1. a company can identify new products 2. the company can go for new sectors 3. the company can go for new geography 4. New economy - the company can go and extend their market. 5. Company can take the advantage of the changing lifestyle & Can go for the opportunities available technology changing.
  58. 58. What is SWOT Analysis? THREATS: 1. Political threats 2. Environmental threats 3. Technology threats 4. From the partners business 5. From the buyers 6. From the suppliers 7. From the key staff/employees
  59. 59. Three stages of a SWOT analysis a) Identify. b) Draw conclusions. c) Translate into strategic action.
  60. 60. Advantages of SWOT Analysis 1. Consolidate strengths 2. Minimizes Weaknesses 3. Helps to Grab Opportunities 4. Minimizes Threats 5. Facilitates Planning 6. Facilitates Alternative Choice 7. Helps to Innovate 8. Ensure Survival & Success
  61. 61. Nirma chemicals ltd. Nirma was a basic detergent with no color, design or sophistication on the pack the product. Was priced at around 35% of surf. Price, medium quality, distribution reach and effective use of media. Market share grew from 0% in 1976 to about 60% in 1987 in over a period of ten years It has become the largest selling brand and the success of nirma is due to affordable price. The title 'NIRMA GIRL' going round and round on her feet makes a strong impact for the brand.
  62. 62. STRENGTH :- Strong brand equity. Nirma is a rs.17 billion umbrella brand offering consumers a brand portfolio of products at multiple price points in detergents, soaps & personal care market. Market leadership in detergents and fabric wash. Has wide distribution network. Its strategy of rural marketing is its unbeatable strength.
  63. 63. WEAKNESSES:- -high interest burden. -less presence in premium segment. -lacks global tie up OPPURTUNITIES:- -exports. -acquisitions for strengthening its distribution tie-ups. -entry into other categories like shampoos, toothpastes and fabric whiteners. THREATS:- -MNCs are approaching Indian markets. -brand name products have greater influence over it. -nirma has been able to niche for itself in the face of intense MNC competition
  64. 64. Nirma SWOT Analysis NIRMA's achievement is surely something about which an Indian can be proud of brand that has lived up to its catch line; BETTER PRODUCTS ,BETTER VALUE ,BETTER LIVING...!