ENVIRONMENT SCANNING

Introduction

Need for Environment Scanning

Appraisal of external environment

Dynamics of internal environment

Porter’s Five forces model

BCG Matrix

Porter's Generic Strategies

Value Chain analysis

Types of Adaptive strategies

ⱺ Environmental Scanning means an examination and study of the environment of a business unit in order to identify its survival and prosperity chances.

ⱺ It includes analysis of internal as well as external environment.

ⱺ In short, the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business is known as environmental scanning.

o Prime Influence – Environment is a prime influence on the effectiveness of business strategies. If strategic planning is done without considering environment, it is likely to be defective.

o A tool to anticipate Changes – Environmental scanning is a very useful tool not only to understand business surroundings, but also as a good instrument to anticipate the changes and be prepared to face the challenges of such changes.

o Early Warning system - Environmental Scanning gives advance warning or danger signals of the adverse changes in environment.

It means scanning the external environment.

It includes following points –

1. Economic environment

2. Demographic environment

3. Technological environment

4. Legal & political environment

5. Socio-culture environment

6. Global/International environment

These factors of external environment affects the business externally. So, while making strategies keeping in mind to analysis or scan the external environment.

It includes –

a. Organisational resources

b. Organisation behavior

c. Strength and weakness

d. Organisation capabilities

e. and so on..

These factors also affect the strategic planning.

Note – Here, we came to know that it is necessary to analysis the internal & external business environment (because it is so dynamic - keeps on changing)for making good strategies.

It is an analysis tool that is uses for determining the intensity of competition in an industry and its profitability level.

This model was created by Michael Porter in 1979 to understand how five key competitive forces affecting an industry.

It includes :-

1. Threats of new entrants

2. Bargaining power of suppliers

3. Bargaining power of buyers

4. Threats of substitutes

5. Rivalry among existing competitors

Industry Rivalry

Threats of entry

Bargaining power of buyers

Threats of substitutes

Bargaining power of suppliers

I. Threats of new entrants –

• This force determines how easy to enter into a particular industry.

• If there is few barrier on entry of new firm then it easily established, results in profit start falling.

• So, it is essential to create a high barrier to enter a new firm.

• Threats of new entrant is high when –

Low amount of capital required for entering, no government regulation, economies of scale can be achieved easily, existing firms do not possesses patents, trademarks etc. and so…

II. Bargaining power of suppliers –

• Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to their buyers.

• This directly affects the buying firm’s profit because it has to pay more for materials.

• There are some reasons of high bargaining power of suppliers are –

Few suppliers, suppliers hold scare resources, cost of switching raw materials is especially high and so on…

III. Bargaining power of buyers –

• Buyers have power to demand high quality products at low cost.

• Here, low price means low revenue for producers, while high quality products usually raise production costs.

• Buyers have high bargaining power when –

Buyers in large quantities, many substitute, buyers are price sensitive and so on….

IV. Threats of substitutes –

• For example :- switch from coffee to tea, from car to bicycle and so on.

• There are more alternative available in the market.

V. Rivalry among existing competitors –

• Rivalry among competitors are increased when :

Many competitors, exit barriers are high, industry growth is slow, competitors are equal size, products are homogeneous and so on..

These five forces affects the strategy decision.

Question mark

Stars

Dog Cash Cow

Ma

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et

gr

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th r

ate

fo

r

pr

od

uc

ts/s

er

vic

es High

Low

Market Share of product/services

Low High

BCG Matrix = Boston Consulting Group Product Portfolio Matrix.

It is designed by Bruce Henderson in 1970’s.

It is made for help in long-term strategic planning.

It is also known as Growth/Share matrix.

I. Question Mark –

• Here, product is in high growth market but have low market share.

• So, it preferred growth or retrenchment strategy.

• E.g.:- Nestle noodles

II. Stars –

• Here, product is in high growth market and have a high market share.

• So, it preferred growth strategy.

• E.g.:- Mc Donald

III. Dog –

• Here, product is in low growth market and also have low market share.

• So, it preferred retrenchment strategy.

• E.g.:- Subway

IV. Cash Cows –

• Here, product is in low growth market but have a high market share.

• So, it preferred stability or modest growth strategy.

• E.g.:- KFC

Cost leadership

Differentiation

leadership

Cost focusDifferentiation

focus

Scop

e

Source of competitive Advantage

Broad

Narrow

Cost Differentiation

This model is developed by Michael Porter.

Porter suggested four “generic” business strategies that could be adopted in order to gain competitive advantage.

Under this model there are four strategies –

1. Cost Leadership

2. Differentiation leadership

3. Cost focus

4. Differentiation focus

I. Cost leadership –

• With this strategy, the objective is to become the lowest-cost producer in the industry.

• To be the lowest-cost producer, a firm is likely to achieve or use several of the following :

1. High levels of productivity

2. High capacity utilisation

3. Lean Production method (i.e. Just-in-time)

4. Effective use of technology in production process

5. Use of bargaining power to negotiate the lowest prices for production inputs

6. Access to most effective distribution channel.

II. Differentiation leadership –

• With this strategy, the business targets much larger markets and aims to achieve competitive advantage through differentiation across the whole of an industry.

• This strategy is usually associated with charging a premium price for the product-often reflects the higher production cost and extra value-added features provided for the customer.

• This would be achieved through several ways –

1. Superior product quality

2. Branding

3. Consistent promotional support

4. And so on..

E.g. :- Nike & Mercedes

III. Cost Focus –

• Here a business seeks a lower-cost advantage in just one or a small number of market segments.

• The product will be similar and have a high price and featured market leader, but tis product is acceptable by some customer.

IV. Differentiation Focus –

• In this strategy, business aims to differentiate within just one or a small number of target market segments.

• This strategy is made due to different needs and wants of customer.

• It is the classic niche marketing strategy (focus on particular section of the market).

• E.g. :- Tyrrell's Crisps.

So, these are four strategies, through which any business gains competitive advantage.

M. Porter introduced the generic value chain model in 1985.

Value chain analysis (VCA) is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation.

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to recognize, which activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm and which ones could be improved to provide competitive advantage.

Inbound Logistics

Operations Outbound

Logistics

Marketing & Sales

Service

Firm InfrastructureHuman Resource

Management

Procurement Technology

P

R

O

F

I

T

Primary Activities

Support Activities

There are two types of firms activities-A. Primary activities - those activities that are involved in the creation, sale and

transfer of products (including after-sales services).• Inbound Logistics• Operations • Outbound logistics• Marketing & Sales• ServicesB. Support activities – those activities which are merely support primary activities .• Firm Infrastructure• Human resource management• Procurement• Technology

Inbound Logistic - concerned with receiving, storing, distributing raw materials (e.g. handling of raw materials, warehousing, inventory control).

Operations - comprise the transformation of inputs into final products (e.g. production, assembly and packaging).

Outbound Logistic - involves the collecting, storing and distributing the products to buyers (e.g. processing of orders, warehousing of finished products and delivery).

Marketing & Sales - identification of customer needs and generation of sales (e.g. advertising, promotion, distribution)

Services – involves after sale-services (e.g. installation, repairs, maintenance)

Firm Infrastructure – involves organisation structure, control system, company culture.

Human resources management – involved in recruiting, training, development and compensation.

Procurement – concerned with the tasks of purchasing inputs such as raw materials, equipment and labour.

Technology – includes improvement of product quality.

Firm InfrastructureHuman Resource

Management

Procurement Technology

☺To reduce costs or increase differentiation.

☺To provide competitive advantage.

☺Helps to stay out of “no profit zone”.

☺And so on….

Prospector Strategy – pursuing innovations & new opportunities in the face of risk and with prospects for growth.

Defender Strategy – protecting current market share by emphasizing existing products and current share without seeking growth.

Analyzer Strategy – maintaining stability of a core business while exploring selective opportunities for innovation and change.

Reactor Strategy – merely responding to competitive pressure in order to survive.