2_business environment and strategic management

8/6/2019 2_Business Environment and Strategic Management

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Business Environment and Strategic

ManagementIntroduction

One of the most critical challenges is to cope up with

the environmental dynamics of change which many a

time assumes the nature of turbulence. The business

environment presents two challenges to the enterprise,

viz., the challenge to combat the environmental threats

(such as intensification of competition, decliningmarket etc.) and to exploit the business opportunities.


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Definition

Environmental analysis is defined as "the process bywhich strategists monitor the economic,

governmental/legal, market/competitive, supplier/technological, geographic, and social settings todetermine opportunities and threats to their firms.

"Environmental diagnosis consists of managerialdecisions made by analyzing the significance of thedata (opportunities and threats) of the environmentalanalysis.

Environmental analysis is an essential prerequisite forstrategic management decision-making.


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Just as the life and success of an individual depend on

his innate capability, including physiological factors,

traits and skills, to cope with the environment, the

survival and success of a business firm depend on itsinnate strength resources as its command,

including physical resources, financial resources, skill

and organization and its adaptability to the

environment.

Types of Business Enterprise

Every business enterprise, thus, consists of a set of

internal factors and is confronted with a set of externalfactors.


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The internal factors are generally regarded as

controllable factors because the company has control

over these factors; it can alter or modify such factors

as its personnel, physical facilities, organisation andfunctional means, such as marketing mix, to suit the

environment.

The external factors, on the other hand, are, by andlarge, beyond the control of a company. The external

or environmental factors such as the economic factors,

socio-cultural factors, government and legal factors,

demo-graphic factors, socio-cultural factors,government and legal factors, demo-graphic factors,

geo-physical factors etc., are, therefore, generally

regarded as uncontrollable factors.


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Internal

Environment

Business

Decision

External

Environment

Types of Business Environment

Value System

Mission and Objectives

Management Structure and Nature

Internal Power Relationship

Human Resources

Company Image and Brand EquityOther Factors

Micro Environment

Suppliers

Customers

Competitors

Marketing

IntermediariesPublics


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Internal Environment

Value System

The value system of the founders and those at thehelm of affairs has important bearing on the choice of

business, the mission and objectives of the

organisation, business policies and practices. It is a

widely acknowledged fact that the extent to which thevalue system is shared by all in the organisation is an

important factor contributing to success.


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Mission and Objectives

The business domain of the company, priorities,direction of develop-ment, business philosophy,business policy etc., are guided by the mission and

objectives of the company.

Management Structure and Nature

The organizational structure, the composition of theBoard of Directors, extent of professionalisation ofmanagement etc., are important factors influencingbusiness decisions.


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Internal Power Relationship

Factors like the amount of support the top

management enjoys from different levels of

employees, shareholders and Board of Directors have

important influence on the decisions and their

implementation .Human ResourcesThe characteristics of the human resources like skill,quality, morale, commitment, attitude etc., could

contribute to the strength and weakness of anorganisation. Some organizations find it difficult tocarry out restructuring or modernization because ofresistance by employees whereas they are smoothly

done in some others.


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Company Image and Brand

Equity

The image of the company matters while raisingfinance, forming joint ventures or other alliances,soliciting marketing intermediaries, entering purchaseor sale contracts, launching new products etc. Brandequity is also relevant in several of these cases.

Other Factors

Physical Assets and FacilitiesR & D and Technological CapabilitiesMarketing Resources

Financial Factors


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External Environment

Micro Environment

It is now unquestionably accepted that the prospects

of a business depend not only on its resources but

also on the environment. An analysis of Strengths,

Weaknesses, Opportunities and Threats (SWOT) isvery much essential for the business policy

formulation.

Suppliers


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Customers

The choice of the customer segments should be made

by considering a number of factors including therelative profitability, dependability, stability of demand,growth prospects and the extent of competition.

Competitors

This competition among these products may bedescribed as desire competition as the primary task

here is to influence the basic desire of the consumer.The competition among such alternatives whichsatisfy a particular category of desire is called generic

competition.


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In other words, there is a product form competition.

Finally the consumer encounters the brandcompetition i.e., the competition between the different

brands of the same product form.

Marketing Intermediaries

The immediate environment of a company mayconsist of a number of marketing intermediaries whichare "firms that aid the company in promot-ing, sellingand distributing its goods to final buyers.


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Publics

A company may encounter certain publics in itsenvironment. "A public is any group that has an actual

or potential interest in or impact on an organisation's

ability to achieve its interests". Media publics, citizens

action publics and local publics are some examples.


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MACRO

ENVIRONMENT

ECONOM

IC

FACTOR

S

INTERNATION

AL

FACTORS

SUPP

LIER

SMICRO

BUSINESS

ENVIRONMENT

DEMOGRAPHIC

FACTORS

NATURA

L

FACTOR

S

MARKETING

INTERMEDIARIES

PUBLICS COMPETITORS

S

OCIO

CULT

URAL

FACTO

RS

POL

ITICAL&

GOVTFACTO

RSCUSTOMERS

Internal


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Macro Environment

Economic Environment

Economic conditions, economic policies and the

economic system are the important external

factors that constitute the economic environment

of a business.1. The economic conditions of a country - for

example, the nature of the economy, the stage of

development of the economy, economic resources,

the level of income, the distribution of income and

assets, etc. are among the very important

determinants, of business strategies


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2. The economic policy of the government, needless

to say, has a very great impact on business. Some

types or categories of business are favorablyaffected by government policy, some adversely

affected, while it is neutral in respect of others.

The scope of private business depends, to a largeextent, on the economic system. At one end, there

are the free market economies or capitalist

economies, and at the other end are the centrally

planned econo-mics or communist countries. In

between these two are the mixed econo-mies.

Within the mixed economic system itself, there are

wide variations


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Countries like the United States, Japan, Australia,

Canada and member countries of the EEC are

regarded as market economies.

China, East Germany Soviet Union, Czechoslovakia,

Hungary, Poland, etc., had centrally planned

economies. However, recently several of thesecountries have discarded communist system and

have moved towards the market economy.


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Political and Government Environment

Therefore a considerable part of the attention of a the

Chief Executive and his senior colleagues has tobe devoted to a continuous dialogue with various

government agencies to ensure growth and

profitability within the framework of controls and

restraints.

The differences in language sometimes pose a

serious problem, even necessitating a change in

the brand name. Preett was, perhaps, a goodbrand name in India; but it did not suit in the

overseas market;


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and hence it was appropriate to adopt 'Prestige' for

the overseas markets. Chevrolet's brand name

*Nova' in Spanish means "it doesn't go". InJapanese, General Motors' "Body by Fisher"

translates as corpse by Fisher". In Japanese,

again, 3M's slogan "sticks like crazy" translates as

"sticks foolishly". In some languages, Pepsi-Cola'sslogan "come alive" translates as "come out of the

grave.

The values and beliefs associated with colour varysignificantly between different cultures. Blue,

considered feminine and warm in Holland, is

regarded as masculine and cold in Sweden.


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Green is a favorite color in the Muslim world; but in

Malaysia, it is associated with illness. White

indicates death and mourning in China and Korea;but in some countries, it expresses happiness and

is the color of the wedding dress of the bride. Red

is a popular color in the communist countries; but

many African countries have a national distaste forred color.

There are also a number of demographic factors, such

as the age and sex composition of population,family size, habitat, religion, etc., which influence

the business.


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Demographic Environment

While dealing with the social environment, we must

also consider the social environment of the

business which encompasses its social respon-

sibility and the alertness or vigilance of the

consumers and of society at large.

Demographic factors like the size, growth rate, age

composition, sex composition, etc. of the

population, family size, economic stratification of

the population, educational levels, language,

caste, religion etc. are all factors which are

relevant to business.


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Natural Environment

Geographical and ecological factors, such as natural

resource endowments, weather and climatic

conditions, topographical factors, locational

aspects in the global context, port facilities, etc.,

are all relevant to business.

Physical and Technological Environment


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International Environment

The international environment is very important from

the point of view of certain categories of business.It is particularly important for industries directly

depending on imports or exports and import-

competing industries. For example, a recession in

foreign markets, or the adoption of protectionistpolicies by foreign nations, may create difficulties

for industries depending on exports. On the other

hand, a boom in the export market or a relaxation

of the protectionist policies may help the export-oriented industries. A liberalization of imports may

help some industries which use imported items, but

may adversely affect import-competing industries.


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Environmental Change

Business environment is dynamic. Many elements in

the environment undergo changes. Technological

changes are frequent. Tastes and the preferences of

the people change. The competitive situation changes.

Demographic factors, including population size,

change.Altitudes and value systems undergo changes.Economic factors, like income, change continuously.

Government policies and regulations also change to

cope with the changing environment.All these factors

indicate that a business policy should be dynamicenough to be successfully adaptable to the changing

environment. The success of a business depends on

its ability to foresee the environmental changes and to

modify its business strategies appropriately


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Techniques for Environmental Analysis

Verbal and written information

Search and scanning

Spying

Forecasting and formal studies


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Strategic Management

An analysis of SWOT (i.e., strengths and weaknesses

of the company and the opportunities and threats inthe environment) plays a very important role in the

strategic management process or the formulation of

business policy. A look at the strategic management

process would make the importance of the external-internal factors nexus more clear.

Glueck defines strategy as a "unified, comprehensiveand integrated plan relating the strategic advantages

of the firm to the challenges of the environment. It is

designed to ensure that the basic objectives of the

enterprise are achieved


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Strategic management is defined as that set of

decisions and actions which leads to the developmentof an effective strategy or strategies to help achieve

corporate objectives.

Chandler describes strategic management as the

determination of the basic long-term goals and

objectives of an enterprise and the adoption of

courses of action and allocation of resourcesnecessary to carry out these goals.


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Strategic management or business policy is the means

to achieve the objectives. Strategic managementprocess involves ascertaining the objectives, analysis

of the environmental opportunities and threats and

appraising the strengths and weaknesses of the firm to

tap the opportunities or to combat the threats,formulating strategies to achieve the objectives on the

basis of the SWOT analysis, choosing the most

appropriate strategy, implementation of the strategy

and reformulation of the objectives or strategy, ifneeded


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Formulation of

Objectives

SWOT

Analysis

Consideration of

Strategic

Alternatives

Choice of

StrategyImplementation Evaluation


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A strategy is, in fact, a means to achieve the ends or

objectives. Objectives should not be static, they should

be dynamic.

To formulate clear objectives, it is essential to get

definite answers to certain questions, viz., "what

business the company is in?" "What should the

company's business be?" "What will the company'sbusiness be?"

Environmental analysis will help find answer to the

question what should the company's business be?. If

'what should be the business' is different from 'what isthe business', there is certainly a need for redefining

the business, matching the company resources to the

environment.


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Identification of the threats and opportunities in the

environment and the strengths and weaknesses of the

firm is the cornerstone of business policy formulation;

it is these factors which determine the. course/coursesof action to ensure the survival and/or growth of the

firm.


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A company which plans to market its products in

foreign markets may have the following

alternatives:

1. Manufacture the product completely in the home

country and export it to the foreign market.

2. Establish manufacturing facility in a free area like

an export processing zone and make exports fromthere.

3. Establish manufacturing facility in the foreign

country and undertake the complete manufacturing

of the product there.

4. Manufacture the components at home and

assemble the product in the foreign market.


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Implementation

A good strategy is not a sufficient condition for

success; its effective implementation is equally

important. Many good strategies fail to achieve the

results because of poor implementation. It isnecessary to formulate a detailed plan to achieve

the objectives by means of the chosen strategy.

The term implementation is used in a broad sense

so that it encompasses also the formulation of theplan to implement the strategy.


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In a multi-unit business, formulation of different levels

of strategies is an essential and important aspect

of implementation. There are three levels-of

strategies applicable to such a business.

Corporate Level Strategy:This is the master strategyto achieve the overall corporate objectives. The

other levels of strategies are designed to

implement the corporate strategy and they are,

therefore, formulated with reference to the

corporate strategy.


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SBU Level Strategy:It is the strategy to achieve the

specific objectives of the strategic business unit

(SBU) so as to help achieve the overall corporate

objectives. A SBU is an operating division of a firm

which serves a distinct product/market segment or

a well-defined set of customers or a geographicarea. The SBU is given the authority to make its

own strategic decisions within corporate guidelines

as long as it meets corporate objectives. The SBU

is also known as operating division.


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Functional Level Strategy:

The task of implementation involves mobilization and

deployment of resources, including personnel,

needed for implementation, organizing and

assigning tasks to the various elements of the

organization. For effective implementation of the

strategy it is essential to formulate an

implementation strategy.


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Evaluation

Evaluation of strategy is that phase of the strategic

management process in which the top managersdetermine whether their strategic choice as

implemented is meeting the objectives of the

enterprise

Failure to achieve the results may arise from any one

or more of the following:

1. Improper implementation of the strategy.

2. Environmental changes which were not anticipatedwhile formulating the strategy.


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3. Inappropriate strategy.

Improper implementation of the strategy may be due to

a) inappropriateness of the implementation strategy.b) inefficiency and/or lack of commitment of the

personnel in charge of implementation.

c) wrong assignment of the tasks; ord) inadequacy of resources.

Environmental changes such as increase in

competition, changes in consumer preferences or

altitudes, technological changes which could not

be anticipated while formulating the strategy etc.

may come in the way of achieving the results.


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Conclusion

The key to business success is the most effective

utilization of the company's resources (resourceshere mean not only the existing resources but also

the additional resources it can mobilize and

augment for any specific task). This involves the

evaluation of the company's strengths andweaknesses in the light of the environmental

threats and opportunities and taking appropriate

measures to harness the opportunities or to

combat the threats and formulation of strategies

accordingly.

2_business environment and strategic management

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