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The Environment, its Analysis and Value Creation

Session 1 of the Software business management course

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• Discuss the current external environment and its implications for your business

• Identify the inputs, processes and outputs that drive your firm forward

• Discuss the relevance of the Porter’s Value Chain, PEST and SWOT analysis in understanding your environment

• Consider environmental analysis from a dynamic systems perspective

• Undertake environmental scanning and exploratory research using focus groups and in-depth interviews

• Define critical thinking and explain how group think and marketing myopia can adversely impact upon your business and your ability to review your environment

• Identify and respond to key environmental issues

Objectives of the Session 1

At the completion of this session you should be able to:

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The environment

An OECD report in 2002, ‘OECD Information Technology Outlook’, stated that:

despite current cyclical difficulties, trend growth of the ICT sector remains strong and the overall market for ICT goods and services continues to grow

the ICT sector is highly globalised and will become more so with intra-firm trade becoming more important

mergers, acquisitions and strategic alliances are more and more focusing on R&D and technology access

software that underpins network integration, interconnection and compatibility is now critical, and

demand for ICT skills continue to grow, creating concerns about possible labour shortages and gaps.

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The environment cont.

The OECD also identified in a 2003 report that:

Software companies are about to confront significant challenges driven by the dynamics of the environment in which they operate.

In particular it identified that firms confronted significant challenges as they attempt to develop global products.

These challenges, it was argued, are exacerbated because of a lack of management skill and experience in many small and medium sized firms, particular skills pertaining to operating in global markets.

It was also stated that greater competitiveness over the medium to long term will be achieved if these firms cooperate

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The environment cont.

Gartner in 2003 also identified that:

Buyer behaviour has changed, significantly reducing new sales revenue

The CFO is now acting as a gatekeeper rather than advisor, making new project funding harder to achieve

The appropriate response is argued to be better management and tighter planning and cost control

There will be a need to prove the value of the solution

Better service and greater product flexibility will become even more important.

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The environment cont.

Research conducted by EDRI also indicates that:

New business throughout the World is getting harder to secure

Price competition is growing and margins are being squeezed

Qualified staff, particularly programmers who can interpret what clients want, are hard to get

Reputation and evidence of having completed successful projects is becoming more important – who you know as much as what you know

Relationships and networks are critical

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The environment cont.

In addition, EDRI research report no. 1 reports that:

ISVs that pursue innovative product/market expansion strategies outperform those that don’t.

ISVs that utilise advertising and seek to build a recognized and reputable brand outperform those that don’t.

ISVs that emphasise customer service strategies that facilitate the ‘keeping’ of customers outperform those who don’t.

Low cost strategies may facilitate short term objectives but do not appear to facilitate long term competitiveness.

ISVs that undertake a sophisticated planning process outperform those that don’t.

ISVs that monitor their performance outperform those that don’t.

Refer Reading 1 for EDRI Research Report No. 1

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Understanding the environment

The environment of the firm

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Understanding the environment cont.

PEST• Political• Economic• Social• Technological

SWOT• Strengths• Weaknesses• Opportunities• Threats

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Understanding the environment cont.

However these traditional ways of understanding and evaluating environments are limited in that they are usually operationalised through 12 month analysis from which an organisation (or more specifically its managers) seek to mould the organisation to achieve the best possible ‘fit’ with the environment.

This does NOT work, particular for small firms competing in dynamic

markets

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Understanding the environment cont.

Environmental analysis, understanding and response must be an ongoing adaptive process.

Managers must be inquisitive participants in the organisation who are focused on the unexpected responses of the organisation and its members to the environment, while communicating constantly with staff about the environment and its meaning.

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Understanding the environment cont.

Managers must move from the perspective that the they must make a choice, to one where they focus on the quality of participation.

Quality participation will in turn lead to quality choices being made and the organisation will be more adaptive, agile and competitive.

It’s a perspective that argues that organisations must be seen as complex adaptive systems - not

cybernetic (cause and effect) systems.

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Understanding the environment cont.

Observe Orientate

DecideAct

The OODA loop: note additional reading provided at end of session 3

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Market research for everyone

• Therefore, you as owner/managers need to know how to monitor the environment and communicate this knowledge.

• Following is a framework for undertaking constant, practical, systematic and effective environmental scanning and research.

• Later sessions provide means of communicating this information effectively through the organisation.

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Environmental scanning – the first step

• Designed to detect indications of environmental changes in their initial stages of development.

• The aim is to identify opportunities and threats, hence it forms the basis of defensive and go-forward strategies.

• Identify several sources of information which you refer to constantly and systematically for environmental scanning purposes.

Environmental scanning entails information gathering and fact finding.

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Environmental scanning

• Industry publications

• Relevant internet sites

• Respected industry peers (whom you meet regularly for a beer or over dinner to compare notes)

• The Asia Pacific ICT Enterprise Development and Research Institute (EDRI)

• Your Microsoft representative

• Customers (whom you specifically organise to meet regarding ‘big picture’ or strategic issues rather than operational issues)

• Suppliers (again who you specifically organise to meet regarding strategic rather than operational issues)

• Staff (who you listen to attentively in meetings where you again consider strategic rather than operational issues).

Suggested sources include:

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Targeted research – the second step

Targeted research is research that seeks to find answers to specific questions.

For example, seeking more information on an opportunity that you have identified through environmental scanning.

Or finding reasons behind slow sales to a targeted customer group.

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Targeted research

Targeted research is undertaken in a number of stages. These are:

• Stage 1: Problem definition (not the symptom) • Stage 2: Research design (who, what, how, when, where)

• Stage 3: Data collection (mail, phone, face-to-face)

• Stage 4: Analysis

• Stage 5: Research Report

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Targeted research

You have been provided in Reading 2 with information on:

• focus group research and

• convergent interviews (a type of in-depth interview).

Note: These guidelines are by nature introductory, with additional sources being suggested. You can and

should undertake some form of systematic market research and that these two techniques are

achievable from a cost, skill and effectiveness perspective.

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Critical thinking – a central element of market analysis

Critical thinking is all about questioning your assumptions. It is an important issue because two negative outcomes emerge if critical thinking is not practiced.

The first of these outcomes is ‘group think’ .

The second ‘marketing myopia’.

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Groupthink – the danger of conformist decision making

What is Groupthink?• tendency for members of highly cohesive

groups to conform so strongly to group pressures regarding a certain decision that they fail to think critically and reject the potentially correcting influences of outsiders

Strategies for avoiding groupthink!• promote open inquiry • use subgroups• admit shortcomings • hold second-chance meetings

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Marketing Myopia – missing the moving market

Over 40 years old, yet the concepts are still applicable today.

Levitt pointed out that there is no such thing as a growth industry, only companies organised and operated to create and capitalise on growth opportunities.

“Marketing Myopia”, by Theodore Levitt published in the Harvard Business Review, 1960.

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Marketing Myopia cont.

The rule is that there is no guarantee against product obsolescence.

• As a result, products will come and go and in your industry, they come and go quickly. So you must not allow yourself to be product oriented. Rather you must strive to provide your customers with value, an idea we return to in great detail later on.

• Put it this way, you are not in the software business. Rather, you are in the business solutions business, the telecommunications business etc.etc.