2. TOPIC NO. 1
What is Environmental scanning? Explain structural Analysis and
Competitive forces in detail?
Environmental scanning
A basic tenet of strategic management is that firms need to formulate strategies to take
advantage of external opportunities and avoid or reduce the impact of external threats. For this
reason, identifying, monitoring, and evaluating external opportunities and threats are essential
for success. This process of conducting research and gathering and assimilating external
information is sometimes called environmental scanning or industry analysis. Lobbying is one
activity that some organizations use to influence external opportunities and threats
Environmental scanning is a process that systematically surveys and interprets relevant data to
identify external opportunities and threats that could influence future decisions. It is closely
related to a S.W.O.T. analysis and should be used as part of the strategic planning process.
Components of external scanning that could be considered include:
Trends: What trends are occurring in the marketplace or industry that could affect the
organization either positively or negatively?
Competition: What is your competition doing that provides them an advantage? Where
can you exploit your competition's weaknesses?
Technology: What developments in technology may impact your business in the
future? Are there new technologies that can make your organization more efficient?
Customers: How is your customer base changing? What is impacting your ability to
provide top-notch customer service?
Economy: What is happening in the economy that could affect future business?
Labor supply: What is the labor market like in the geographies where you operate? How
can you ensure ready access to high-demand workers?
Political/legislative arena: What impact will election outcomes have on your business? Is
there impending legislation that will affect your operations?
Each organization must identify what external factors are most impactful to make the
environmental scan a useful tool.
The next step is to conduct an internal scan of the organization. Review the company's vision,
mission and strategic plan. Examine the organization's strengths and weaknesses. Consider
where the company is now and where it plans to be in five or 10 years. Interview or survey leaders
of the company.
3. Once an organization has gathered information about the external world, its competitors and
itself, it should then develop strategies to respond to impacts when the need arises.
When conducting an environmental scan, a variety of methods should be used to collect data,
including reviewing publications, conducting focus groups, interviewing leaders inside and
outside the organization, and administering surveys.
Environmental scanning is an important component of strategic planning as it provides
information on factors that will affect the organization in the future. The information gathered
will allow leadership to proactively respond to external impacts.
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 vigil 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 —
4. 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 its
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.
Structural Analysis and Competitive forces
An important part of an external audit is identifying rival firms and determining their strengths,
weaknesses, capabilities, opportunities, threats, objectives, and strategies. George Salk stated,
“If you’re not faster than your competitor, you’re in a tenuous position, and if you’re only half as
fast, you’re terminal.”
Collecting and evaluating information on competitors is essential for successful strategy
formulation. Identifying major competitors is not always easy because many firms have divisions
that compete in different industries. Many multidivisional firms do not provide sales and profit
information on a divisional basis for competitive reasons. Also, privately held firms do not publish
any financial or marketing information. Addressing questions about competitors, such as those
presented in Table, is important in performing an external audit.
Competition in virtually all industries is intense—and sometimes cutthroat. For example,
Walgreens and CVS pharmacies are located generally across the street from each other and battle
each other every day on price and customer service. Most automobile dealerships also are
located close to each other. Dollar General, Dollar Tree, and Family Dollar compete intensely on
price to attract customers away from each other and away from Walmart and Target.
Table: Key questions about Competitors
1. What are the strengths of our major competitors?
2. What are the weaknesses of our major competitors?
3. What are the objectives and strategies of our major competitors?
5. 4. How will our major competitors most likely respond to current economic, social, cultural,
demographic, environmental, political, governmental, legal, technological, and competitive
trends affecting our industry?
5. How vulnerable are the major competitors to our alternative company strategies?
6. How vulnerable are our alternative strategies to successful counterattack by our major
competitors?
7. How are our products or services positioned relative to major competitors?
8. To what extent are new firms entering and old firms leaving this industry?
9. What key factors have resulted in our present competitive position in this industry?
10. How have the sales and profit rankings of our major competitors in the industry changed
over recent years? Why have these rankings changed that way?
11. What is the nature of supplier and distributor relationships in this industry?
12. To what extent could substitute products or services be a threat to our competitors?
Seven characteristics describe the most competitive companies:
1. Strive to continually increase market share.
2. Use the vision/mission as a guide for all decisions.
3. Realize that the adage “If it’s not broke, don’t fix it” has been replaced by “Whether it’s
broke or not, fix it;” in other words, continually strive to improve everything about the
firm.
4. Continually adapt, innovate, and improve— especially when the firm is successful.
5. Strive to grow through acquisition whenever possible.
6. Hire and retain the best employees and managers possible.
7. Strive to stay cost-competitive on a global basis.
Competitive intelligence (CI), as formally defined by the Society of Competitive Intelligence
Professionals (SCIP), is a systematic and ethical process for gathering and analyzing information
about the competition’s activities and general business trends to further a business’s own goals
(SCIP website). Good competitive intelligence in business, as in the military, is one of the keys to
success. The more information and knowledge a firm can obtain about its competitors, the more
likely the firm can formulate and implement effective strategies. Major competitors’ weaknesses
can represent external opportunities; major competitors’ strengths may represent key threats.
Various legal and ethical ways to obtain competitive intelligence include the following:
Hire top executives from rival firms.
Reverse engineer rival firms’ products.
Use surveys and interviews of customers, suppliers, and distributors.
Conduct drive-by and on-site visits to rival firm operations.
Search online databases.
Contact government agencies for public information about rival firms.
6. Systematically monitor relevant trade publications, magazines, and newspapers.
Information gathering from employees, managers, suppliers, distributors, customers, creditors,
and consultants also can make the difference between having superior or just average
intelligence and overall competitiveness.
The three basic objectives of a CI program are
1) To provide a general understanding of an industry and its competitors.
2) To identify areas in which competitors are vulnerable and to assess the impact strategic
actions would have on competitors.
3) To identify potential moves that a competitor might make that would endanger a firm’s
position in the market.
Competitive information is equally applicable for strategy formulation, implementation, and
evaluation decisions. An effective CI program allows all areas of a firm to access consistent and
verifiable information in making decisions. All members of an organization—from the CEO to
custodians—are valuable intelligence agents and should feel themselves to be a part of the CI
process. Special characteristics of a successful CI program include flexibility, usefulness,
timeliness, and cross-functional cooperation.
Competitive intelligence is not corporate espionage; after all, 95 percent of the information a
company needs to make strategic decisions is available and accessible to the public. Sources of
competitive information include trade journals, want ads, newspaper articles, and government
filings, as well as customers, suppliers, distributors, competitors themselves, and the Internet.
Unethical tactics such as bribery, wiretapping, and computer hacking should never be used to
obtain information. All the information a company needs can be collected without resorting to
unethical tactics.
Porter’s Five Forces Model of Competition
Michael Porter (Harvard Business School Management Researcher) designed various vital
frameworks for developing an organization’s strategy.
Porter’s Five-Forces Model of competitive analysis is a widely used approach for developing
strategies in many industries. The intensity of competition among firms varies widely across
industries. One of the most renowned among managers making strategic decisions is the five
competitive forces model that determines industry structure.
Michael Porter’s Five Forces Model is a simple yet effective business analysis tool that is used to
determine whether a strategy has the potential to be profitable in a company’s competitive
environment. When carried out in the right way, with the right tools, the Five Forces Analysis can
provide invaluable insight into your business’s competition and how much power you hold in the
market, so you can adjust your strategy for success.
7. According to Porter, the nature of competition in any industry is personified in the following five
forces:
i. Threat of new potential entrants
ii. Threat of substitute product/services
iii. Bargaining power of suppliers
iv. Bargaining power of buyers
v. Rivalry among current competitors
The five forces mentioned above are very significant from point of view of strategy formulation.
The potential of these forces differs from industry to industry. These forces jointly determine the
profitability of industry because they shape the prices which can be charged, the costs which can
be borne, and the investment required to compete in the industry. Before making strategic
decisions, the managers should use the five forces framework to determine the competitive
structure of industry.
Let’s discuss the five factors of Porter’s model in detail:
1. Risk of entry by potential competitors: Potential competitors refer to the firms which are
not currently competing in the industry but have the potential to do so if given a choice.
Entry of new players increases the industry capacity, begins a competition for market
share and lowers the current costs. The threat of entry by potential competitors is
partially a function of extent of barriers to entry. The various barriers to entry are-
Economies of scale
Brand loyalty
8. Government Regulation
Customer Switching Costs
Absolute Cost Advantage
Ease in distribution
Strong Capital base
2. Rivalry among current competitors: Rivalry refers to the competitive struggle for market
share between firms in an industry. Extreme rivalry among established firms poses a
strong threat to profitability. The strength of rivalry among established firms within an
industry is a function of following factors:
Extent of exit barriers
Amount of fixed cost
Competitive structure of industry
Presence of global customers
Absence of switching costs
Growth Rate of industry
Demand conditions
3. Bargaining Power of Buyers: Buyers refer to the customers who finally consume the
product or the firms who distribute the industry’s product to the final consumers.
Bargaining power of buyers refer to the potential of buyers to bargain down the prices
charged by the firms in the industry or to increase the firms cost in the industry by
demanding better quality and service of product. Strong buyers can extract profits out of
an industry by lowering the prices and increasing the costs. They purchase in large
quantities. They have full information about the product and the market. They emphasize
upon quality products. They pose credible threat of backward integration. In this way,
they are regarded as a threat.
4. Bargaining Power of Suppliers: Suppliers refer to the firms that provide inputs to the
industry. Bargaining power of the suppliers refer to the potential of the suppliers to
increase the prices of inputs( labor, raw materials, services, etc.) or the costs of industry
in other ways. Strong suppliers can extract profits out of an industry by increasing costs
of firms in the industry. Supplier’s products have a few substitutes. Strong suppliers’
products are unique. They have high switching cost. Their product is an important input
to buyer’s product. They pose credible threat of forward integration. Buyers are not
significant to strong suppliers. In this way, they are regarded as a threat.
5. Threat of Substitute products: Substitute products refer to the products having ability of
satisfying customers’ needs effectively. Substitutes pose a ceiling (upper limit) on the
potential returns of an industry by putting a setting a limit on the price that firms can
charge for their product in an industry. Lesser the number of close substitutes a product
has, greater is the opportunity for the firms in industry to raise their product prices and
earn greater profits (other things being equal).
9. The power of Porter’s five forces varies from industry to industry. Whatever be the industry,
these five forces influence the profitability as they affect the prices, the costs, and the capital
investment essential for survival and competition in industry. This five forces model also help in
making strategic decisions as it is used by the managers to determine industry’s competitive
structure.
Porter ignored, however, a sixth significant factor- complementaries. This term refers to the
reliance that develops between the companies whose products work is in combination with each
other. Strong complementors might have a strong positive effect on the industry. Also, the five
forces model overlooks the role of innovation as well as the significance of individual firm
differences. It presents a stagnant view of competition.
TOPIC NO. 2
Explain the structure and performance of industries in detail. And
Explain the Components of Strategies.
Organizational structure aligns and relates parts of an organization, so it can achieve its maximum
performance. The structure chosen affects an organization's success in carrying out its strategy
and objectives. Leadership should understand the characteristics, benefits and limitations of
various organizational structures to assist in this strategic alignment.
Background
Organizational structure is the method by which work flows through an organization. It allows
groups to work together within their individual functions to manage tasks. Traditional
organizational structures tend to be more formalized—with employees grouped by function
(such as finance or operations), region or product line. Less traditional structures are more
loosely woven and flexible, with the ability to respond quickly to changing business
environments.
Organizational structures have evolved since the 1800s. In the Industrial Revolution, individuals
were organized to add parts to the manufacture of the product moving down the assembly line.
Frederick Taylor's scientific management theory optimized the way tasks were performed, so
workers performed only one task in the most efficient way. In the 20th century, General Motors
pioneered a revolutionary organizational design in which each major division made its own cars.
Today, organizational structures are changing swiftly—from virtual organizations to other flexible
structures. As companies continue to evolve and increase their global presence, future
organizations may embody a fluid, free-forming organization, member ownership and an
entrepreneurial approach among all members.
10. Types of Organizational Structures
Organizational structures have evolved from rigid, vertically integrated, hierarchical, autocratic
structures to relatively boundary-less, empowered, networked organizations designed to
respond quickly to customer needs with customized products and services.
Today, organizations are usually structured vertically, vertically and horizontally, or with open
boundaries. Specific types of structures within each of these categories are the following:
1. Vertical—functional and divisional.
1. Divisional by geographic area
2. Divisional by product
3. Divisional by customer
4. Divisional by process
5. Strategic business unit (SBU)
2. Vertical and horizontal—matrix.
3. Boundary-less (also referred to as "open boundary")—modular, virtual and cellular.
1. The Functional Structure
In functional structures, employees report directly to managers within their functional areas who
in turn report to a chief officer of the organization. Management from above must centrally
coordinate the specialized departments.
A functional organizational chart might look something like this:
Table: Advantages and Disadvantages of a Functional Organizational Structure
Advantages Disadvantages
1. Simple and inexpensive 1. Accountability forced to the top
2. Capitalizes on specialization of business
activities such as marketing and finance
2. Delegation of authority and responsibility
not encouraged
3. Minimizes need for elaborate control
system
3. Minimizes career development
4. Allows for rapid decision making 4. Low employee and manager morale
5. Inadequate planning for products and
markets
6. Leads to short-term, narrow thinking
7. Leads to communication problems
11. 2. The Divisional Structure
A divisional structure most often divides work and employees by output, although a divisional
structure could be divided by another variable such as market or region. For example, a business
that sells men's, women's and children's clothing through retail, e-commerce and catalog sales
in the Northeast, Southeast and Southwest could be using a divisional structure in one of three
ways:
Product—men's wear, women's wear and children's clothing.
Market—retail store, e-commerce and catalog.
Region—Northeast, Southeast and Southwest.
A divisional organizational structure might look like this:
Table: Advantages and Disadvantages of a Divisional Organizational Structure
Advantages Disadvantages
1. Clear accountability 1. Can be costly
2. Allows local control of local situations 2. Duplication of functional activities
3. Creates career development chances 3. Requires a skilled management force
4. Promotes delegation of authority 4. Requires an elaborate control system
5. Leads to competitive climate internally 5. Competition among divisions can become
so intense as to be dysfunctional
6. Allows easy adding of new products or
regions
6. Can lead to limited sharing of ideas and
resources
7. Allows strict control and attention to
products, customers, or regions
7. Some regions, products, or customers may
receive special treatment
Divisional Organizational
Structure of Crocs, Inc.
12. 3. The Strategic Business Unit (SBU) Structure
As the number, size, and diversity of divisions in an organization increase, controlling and
evaluating divisional operations become increasingly difficult for strategists. Increases in sales
often are not accompanied by similar increases in profitability. The span of control becomes too
large at top levels of the firm. For example, in a large conglomerate organization composed of 90
divisions, such as ConAgra, the chief executive officer could have difficulty even remembering
the first names of divisional presidents. In multidivisional organizations, an SBU structure can
greatly facilitate strategy-implementation efforts. ConAgra has put its many divisions into two
primary SBUs:
1. Consumer foods
2. Private brands and commercial foods
ConAgra’s SBU structure is illustrated in Figure. Commercial foods are “food for restaurants,”
whereas consumer foods are “food in grocery stores”.
The strategic business unit structure groups’ similar divisions into SBUs and delegates authority
and responsibility for each unit to a senior executive who reports directly to the chief executive
officer.
Two disadvantages of an SBU structure are that it requires an additional layer of management,
which increases salary expenses. Also, the role of the group vice president is often ambiguous.
However, these limitations often do not outweigh the advantages of improved coordination and
accountability. Another advantage of the SBU structure is that it makes the tasks of planning and
control by the corporate office more manageable.
ConArgra’s SBU
Organizational structure
13. 4. The Matrix Structure
A matrix structure combines the functional and divisional structures to create a dual-command
situation. In a matrix structure, an employee reports to two managers who are jointly
responsible for the employee's performance. Typically, one manager works in an administrative
function, such as finance, HR, information technology, sales or marketing, and the other works
in a business unit related to a product, service, customer or geography.
A typical matrix organizational structure might look like this:
Table: Advantages and Disadvantages of a Matrix Organizational Structure
Advantages Disadvantages
1. Clear project objectives 1. Requires excellent vertical and horizontal
flows of communication
2. Results of their work clearly seen by
employees
2. Costly because creates more manager
positions
3. Easy to shut down a project 3. Violates unity of command principle
4. Facilitates uses of special equipment,
personnel, and facilities
4. Creates dual lines of budget authority
5. Shared functional resources instead of
duplicated resources, as in a divisional
structure
5. Creates dual sources of reward and
punishment
6. Creates shared authority and reporting
7. Requires mutual trust and understanding
OPEN BOUNDARY STRUCTURES (HOLLOW, MODULAR VIRTUAL AND LEARNING)
More recent trends in structural forms remove the traditional boundaries of an organization.
Typical internal and external barriers and organizational boxes are eliminated, and all
organizational units are effectively and flexibly connected. Teams replace departments, and the
organization and suppliers work as closely together as parts of one company. The hierarchy is
flat; status and rank are minimal. Everyone—including top management, managers and
14. employees—participates in the decision-making process. The use of 360-degree feedback
performance appraisals is common as well.
Advantages of boundary-less organizations include the following:
Ability to leverage all employees' talents.
Faster response to market changes.
Enhanced cooperation and information sharing among functions, divisions and staff.
Disadvantages include the following:
Difficulty in overcoming silos inside the organization.
Lack of strong leadership and common vision.
Time-consuming processes.
The possibility of employees being adversely affected by efficiency efforts.
The possibility of organizations abandoning change if restructuring does not improve
effectiveness quickly.
The Impact of Organizational Structure on its performance
Organizations typically mature in a consistent and predictable manner. As they move through
various stages of growth, they must address various problems. This process creates the need for
different structures, management skills and priorities.
The impact of organizational structure on its performance include the following:
1. Market Share
Market share is the percentage of the total revenue or sales in a market that a company's
business makes up. An effective organizational structure according to industry type will help it to
achieve greater market share.
2. Customer Satisfaction
Customer satisfaction is defined as a measurement that determines how happy customers are
with a company's products, services, and capabilities. If the structure is more divisionized than it
will help company to focus on each task separately, thus, helps to achieve customer satisfaction.
3. Profitability
Profitability is a measure of an organization's profit relative to its expenses. Organizations that
are more efficient will realize more profit as a percentage of its expenses than a less-efficient
organization, which must spend more to generate the same profit.
4. Sales and Return
An effective organization will help in rapid growth through increase in sales and Return on
Investments.
As an organization grows or passes from one stage of development to another, carefully planned
and well-conceived changes and structures in practices and strategies may be necessary to
maximize effectiveness. In fact, a key opportunity for performance is to recognize indicators that
suggest an organization is in a risky or unhealthy stage and to make appropriate structural
adjustments.
15. Components of Strategies
Strategic Management is perhaps most crucial to organizational planning and direction. It gives
long-term focus to the organization and ensures the achievement of goals within the stipulated
time period.
The onus of strategic management usually lies with the top bosses in the organization. They may
delegate certain tasks of strategic management, but the core planning and monitoring remain in
their purview.
Strategic management comprises the following components:
1. Goal Setting
The American entrepreneur and life coach Tony Robbins says, “Setting goals is the first step in
turning invisible to visible.” How well-said! Unless the organization knows what it wants to
achieve, there is no point in planning ahead. This component is all about setting short-term as
well as long-term goals. These goals should be SMART – Specific, Measurable, Attainable,
Relevant and Timely.
2. Gathering Information
The next component of strategic management pertains to collecting information about all those
internal and external factors that could influence the implementation and hence, the
achievement of goals. For example,
Are there enough resources in terms of finances and manpower to execute a process?
Are there any laws or regulations to be taken care of?
What are competitors doing in the same space?
What are the problems and opportunities that may arise in the future?
3. Strategy Formulation
Once the goals and research are in place, now is the time to formulate a strategy. It determines
what actions need to be taken to accomplish the goals. This is the most elaborate component
of strategic management because how well the strategy is formulated will ensure the success of
it. It also involves the allocation of resources at each phase of implementation. For instance,
phase one will require 20 employees and an investment of Rs.5 lakhs, and then phase two will
require 15 employees and an investment of Rs.2 lakhs.
4. Strategy Implementation
Well, you have the strategy ready in the written format. The next component is to execute it
seamlessly. This is the practical and most rigorous part of strategic management. Whatever you
have planned is converted into actual activities and actions geared towards the delivery of goals.
5. Strategy Evaluation
A strategy on paper may look perfect and doable. But, implementation can prove otherwise.
There can be certain loopholes or deviations from the original planning which may render the
16. strategy futile. In order to ensure that this doesn’t happen, the implementation has to monitor
and evaluate at regular intervals. If there are any issues, they should be plugged immediately.
Predicting the future is a difficult task to fulfill. However, preparing for estimated changes that
are bound to dominate the market by considering the present scenario is an art that can be
satisfied by Strategic Management methodologies.
6. The Start
The most essential element of strategic management revolves around the concept of identifying
and understanding specific organization goals. Setting short term goals is an ideal way to start,
as they act as a direct blueprint in achieving long term objectives. Segregating roles and
responsibilities to individuals and team management should be carried out in this initial stage.
The process provides each member of the firm with a purpose that motivates them in the long
run.
7. Analyzing
To build an efficient strategic management module, thorough market research must be
conducted. The data collected from within the organization and the market help in formulating
a productive plan that acts as a foundation for strategic management. This process allows the
company to identify internal loopholes that have been affecting the operations of the firm.
8. Forming the Strategy
Here, all the data and information collected are utilized to form a unique strategy that fulfills all
the needs and requirements of the company. Based on the manpower available, the firm has to
decide and control the asset purchase and recruitment of professionals. Knowing the potential
of your resources becomes important in strategic management.
9. Implement the Strategy
Planning is only one side of the coin as it needs to be effectively backed by the implementation.
During this stage, all the employees and team involved should have a clear idea of the
organization’s goal and the plan formulated such that the execution can be completed with
perfection. IIM Kozhikode strategic management courses are ideal that train individuals about
the diverse levels involved in management.
10.Monitoring
This stage involves managing, analyzing, tracking, and evaluating all the steps that were
incorporated into the strategic management plan. By this time you will be able to measure the
desired results with the current outcome. Likewise, a new plan must be enforced along with
certain adjustments.
