Environment can be broadly classified into two components: 1)External Environment 2)Internal Environment Literally means Surroundings.

Environment of any organization is the aggregate of all conditions, events and influences that surround and affect it. specifically called Business Environment.

1)Complexity: Environment consists of number of factors, conditions and influences arising from different sources. All of these don't exist in isolation but interact to create new set of influences. 2)Environment is dynamic: i.e. constantly changes due to varied influences. 3)Multi-facet: i.e. same development is welcomed as an opportunity by one company while another company perceives it as a threat.

4)Environment has a far-reaching impact:i.e. growth & profitability depends on environment

The 4 environmental influences : 1)Opportunity: A favorable condition in the organizations environment that strengthen the position of the enterprise. Eg.-Growing demand of the products. 2)Threat: An unfavorable condition that creates risk or, causes damage to the organization. Eg.-Emergence of a new competitor in an industry.

3)Strength: An inherent capacity which an organization can use to gain advantage over its competitors. Eg.-Superior R & D gives new product development. 4)Weakness: An inherent limitation that create strategic disadvantage. Eg.-Overdependence on a single product line.

A systematic approach to understand the environment is SWOT analysis.

External environment consists of all the factors which provide opportunities or, pose threat to an organization. The wider perception of the environment are the general environment. The immediate concerns of any organization are confined to just a part of general environment which has high strategic relevance to the organization. i.e. by identifying the relevant environment an organization can systematically appraise it.

The classification of relevant environment into components to cope up with its complexity and comprehend the different influences and relating the environmental changes to its strategic management processes.

1)Social environment: Demographic characteristics Social Concerns Social attitudes Family Structure Role of women in society Educational levels and awareness

2)Political Environment: Political systems political structure Political processes 3)Economic Environment: Consists of macro-level factors related to means of production and distribution of wealth.

4)Regulatory Environment: Factors related to planning, promotion and regulation of economic activities. Eg.- Industrial policy, capital issues, consumer protection and environmental pollution. 5)Market Environment: Customer factors Product factors Marketing intermediaries Competitor related factors

6)Supplier Environment: Cost Availability Reliability of supply of raw materials. 7)Technological Environment: Cost of technology acquisition Sources of technology Technological development Impact of technology on human being

Process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business known as Environmental Scanning. Factors considered environmental scanning: 1.Events:Important occurrences taking place in different environmental sectors. 2.Trends:General tendencies along which events take place. 3.Issues:Current concerns in response to events and trends.

4)Expectations: Demands made by interested groups. Eg.-Union Carbide factory explosion in Bhopal 1)Event: Accident and resulting disaster. 2)Trend: General tendency on the part of regulatory authorities and organizations to be conscious about hazardous chemicals. 3)Issue: Rising concern about environmental pollutions. 4)Expectations: Concern of general public to make stricter enforcement in regulations.

1)Systematic Approach: An organization continuously monitor changes and take relevant factors into account. 2)Ad Hoc Approach: Here organization conduct special surveys with specific events evolved or, with a view of special venture from time to time. 3)Processed form approach: Organization collect information from different sources both inside and outside.

QUEST(Quick environmental scanning technique) -Proposed by B.Nanus -Its a 4 step process. -It uses scenario-writing for scanning the environment and identifying the strategic options.

4 Steps involved are: 1)Strategists make observation about major events and trends in their industry. 2)then,they speculate on a wide range of important issues that might affect the future of their organization. 3)Then they prepares a report summarizing the major issues and their implications. 4)Report & scenarios are reviewed to identify the feasible strategic options.

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2.

Identify the factors affecting the environmental appraisal. Structuring the environmental appraisal

Factors affecting environmental appraisal: 1.Strategist related factors 2.Organisation related factors 3.Environment related factors

Factors are trends,events,issues and expectations. A feasible approach to identify imp factors is to test each factor with regard to its impact on the business.

Impact on business High Medium Probability H Critical High Priority Priority Of M High Priority High Priority Impact L Priority
To be watched Priority Low Priority

Low
Low Low Low

To structure the problem area to highlight the opportunities & threats. ETOP(Environmental threat and opportunity profile) technique by Glueck.

Environmental Sectors Impact 1.Social - Customer preference( fashionable, easy to ride and durable) 2.Political -No significant factor 3.Economic -High potential in export 4.Regulatory -A thrust area for exports 5.Market -Industry growth rate is 7-8% 6.Supplier -Mostly associated company supply raw materials. 7.Technological-Upgradation in Progress.

ETOP is done for the sake of simplicity. The main business is manufacturing cycle for domestic and export purpose. Preparation of an ETOP provides a clear picture of the favorable and unfavorable impact of each sector on the organization. It tells the exact position of the company in the environment.

POLITICAL ENVIRONMENT Political consensus on economic reforms SOCIAL ENVIRONMENT Burgeoning middle class Major changes in life style Increased urbanization More & more consumption orientation Double income & nuclear family on rise Living on credit become trend Boom in leisure activities Upwardly mobile social class on the rise

ECONOMIC ENVIRONMENT Continuation of economic reforms & liberalization Big growth in service sector Inflation continue as a problem, but no excessive rise in recent times Energy especially petroleum energy becoming more scarce & costly labor situation attractive -Abundance of skilled workers, passenger car industry and auto ancillaries well endowed with skilled workers.

TECHNOLOGICAL ENVIRONMENT
More liberal approach to technology import Significant efforts at internal technology development CONSUMER / DEMAND Increasing affluence of urban consumers. Larger consumer base

Increasing purchasing power Changes in lifestyle support products Changes in buying behaviour -more choosy cars e.g. Style,comfort apart from fuel efficiency COMPETITION
Total change in competitive scenario Intense competition

SUPPLIER India -major producer of steel -raw material no problem LEGAL perceived sound by world players TECHNOLOGY Major changes It is in hands of world majors in the industry Very few players have technology for small cars

THE INDUSTRY Passenger car industry -GROWTH INDUSTRY (short term & medium term) Industry structure changing -delicensing & opening up of industries for foreign investment Gaining an expert orientation Industry attractiveness -reasonably good in short term & medium term.

1)Divide the environment into different sectors. 2)Then analyzing the impact of each sector on the organization. A Summary of an ETOP show the major factors for the sake of simplicity. ETOP.doc

Internal Environment: strength and weakness in different functional area. Organization capability: Capacity and ability to use distinctive competencies to excel in particular field. -Ability to use its S & W to exploit O and face T in its external environment.

All organization, thus, have strengths & weaknesses. The appraisal of internal environment enables a firm to decide about what it can do. The resources,behaviour,strengths & weaknesses and competencies of an organization determine the nature of its internal environment.

Strategic Advantage

Organizational capability

Competencie s

Strengths & Weaknesses

Organizational Resources

Organizational Behaviour

A)Resources: RBV(Resource based view) Firm should possess resources(physical as well as human resource)that are valuable and rare to enable them to achieve strategic advantage. The cost and availability of resources is the most important factor on which success of the organization depends.

For resource to be valuable, it must be either: 1)rare 2)hard to imitate 3)not easily substitutable These are empirical indicators.

 But, mere possession of resources does not make the organization capable, it depends on their usage within the organization. That is based on Organizational behavior.

Means Resource configuration. It leads to development of an organization identity. Eg.- Shared values and culture, management philosophy, quality of leadership etc.. Resources and behaviour collectively produce strength and weaknesses.

Strength is an inherent capability can be used to gain strategic advantage Weakness is an inherent limitation that creates a strategic disadvantage.

Strength & weaknesses like resources and behaviour do not exist individually. Eg.- Marketing and production should support each other leading to operating synergy.On the other hand, a marketing inefficiency reduces production efficiency.

Special qualities. An organization develops its competencies over a period of time. Eg.-Canons core competencies lies in optics. Honda in engines. Core competencies cannot be taken for granted , it get lost over time.

Means potential of an organization to use its strength and overcome its weaknesses in order to exploit the opportunities and face the threats. i.e. coordinating resources and putting them in productive use.

Outcomes of organizational capabilities. Its a reward. Competitive advantage is a special type of strategic advantage where there is one or, more identified rivals against whom rewards or, penalties could be measured.

Its a narrower concept. Competitive advantage is relative rather than absolute.

Capabilities are developed in different functional areas. Its feasible measure too. Organizational capabilities factors are strategic strengths and weaknesses existing in different functional areas within an organization. There are 6 capability factors:-

Related to availability, usages and management of funds. Factors that influence the financial capability: a)Factors related source of fund: Capital procurement, controllership, borrowings, etc

B)Usage of funds: Investment, Fixed asset acquisition, current assets, loans etc.. C)Management of funds: Tax planning, inflation, state of financial health, etc.. Eg.- Reliance Industries can afford to have Rs.61,700 crore capital plan based on its superior ability to raise finances.

Relate to pricing, promotion and distribution of products or, services. Factors which influence market capabilities: a)Product related: variety, quality, etc.. b) Price related: Pricing, policies, etc..

c)Place related: Distribution, marketing channels etc d)Promotion related: Promotional tools, sales, PR etc.. e)Integration factors: Marketing mix, company image etc..

Relates to production of products or, services. Factors influence operations: a)Factors related to production system: Capacity, location, layouts, degree of automation etc.. b) Operations & control system: Production planning,inventory,quality control etc..

C)R & D System: Patents, levels of technology used, technical collaboration etc.. Eg.- J K Tyres has not capitalised in India as its competitor Bridgestone, have access to latest tread patterns , have proved better.

Relate to existence and use of human resources. Factors that influence personnel capabilities: a) Personnel system: Manpower planning, selection, compensation, appraisal etc b)Employee and organizational characteristics: Working condition, Quality of management,etc..

C) Industrial Relations: Union management, safety, collective bargaining etc.. Eg.- IT cos. Implement fun at work schemes.

Management of flow of information from outside into and within an organization. Factors which influence information capabilities : a) Acquisition and retention of information: Sources,quantity,quality,retention capacity and security of information.

B) Processing and synthesis of information: Database management, computer capability and ability to synthesize information. C)Retrieval and usage of information: capacity to assimilate and use of information.

D)Transmission & dissemination: Speed, scope, width and depth of coverage of information, and willingness to accept information. E)Integrative, systemic and supportive factors: availability of IT infrastructure, its relevance and compatibility to organizational needs.

Eg.-Banking is highly integrated business. With a wide geographical spread of branches the need of networking is crucial.

Integration, coordination and direction of functional capabilities towards common goal. Factors that influence the general management capability: a) General management system: planning system, incentives system etc..

B)External relationship: Rapport with the government, public relations, social responsibility etc.. C)Organizational climate: Org. culture, use of power, political powers, etc.. Eg.- Yes bank came with no past track, but high technology and top management proved great.

Related to strategists, the organization and to the internal environment. Ability of strategist to comprehend complexity Size of organization affects the quality of appraisal.

May range from systematic to an ad hoc one. 1)Systematic approach is a proactive measure to appraise by opting a well planned systems. 2)Ad hoc approach is used as a reactive measure under some crisis. Appraisal is needed for strategy formulation.

May be internal or, external sources. Employees opinion, company files and documents, financial statements etc.. In total the sources of information for environmental appraisal could be used for organizational appraisal.

1)

Value Chain analysis: Value Chain analysis was first suggested by Michael Porter (1995) as a way of presenting the construction of value as related to end customer.

 It can be for the product as it relates to end customers or customers within a chain. A value chain is a set of interlinked value-creating activities performed by an organization. Its activities begin with the procurement of basic raw material upto the end products marketed to the ultimate consumers.

Support activities
Firm Infrastructure Human Resource management Technology development Procurement Inbou Outb Marketi nd Opera ound ng & Service Logist tions Logis Sales ics Primary Activities tics

Profit Margin

The goal of these activities is to offer the customer a level of value that exceeds the cost of activities ,there by resulting in increase of profit margin.

1)Inbound logistics: the receiving and warehousing of raw materials and their distribution to manufacturing units. 2) Operations: the process of transforming inputs into finished products.

3)Outbound logistics: the warehousing and distribution of finished goods. 4)Marketing and Sales: Identification of customer needs and generation of sales. 5)Service : after sale services.

1)Infrastructure of the firm: Organization structure and culture. 2)Human resource management: employee recruiting, hiring, training, compensation etc.. 3)Technology development: Technology to support value creating activities.

4)Procurement: purchasing inputs such as materials and equipments. Thus, the firms margin depends on how efficiently these activities are being performed.

Proposed by kaplan and Norton Its a set of measures that gives top managers a comprehensive view of the business. It includes the financial measures that tells the result of action already taken. And complements the financial measures on customer satisfaction, internal processes and organizations innovation activities.

Balance scorecard measures 4 key performance measures: 1)Customer perspective 2)Internal business perspective 3)Innovation and learning perspective 4)Financial perspective

BSC is a tool to convert a strategy into action. Every element selected for a BSC should be an element in a chain of cause & effect relationship that communicates the meaning of the BUs strategy.

Financial

ROC

Customer Loyalty
Customer On-time Delivery

Internal/ Business Process

Process Quality

Process Cycle Time

Learning and Growth

Employee Skills

A. B. C.

Financial Customer
How do we succeed financially? How do we appear to our customers?

Internal Process

D.

Learning and Growth

At what processes must we excel?

How do we sustain our ability to change and grow?

Financial

Sound Fiscal Mgmt

Budgeting

Long-Term Investment Strategy

Customer The Value Proposition

Product/Services Price Selection The Value Proposition Quality Availability

Relationship Partnership Services

Brand Image

Internal Process

Customer Mgmt Deepen Knowledge about customer Attract Retain Grow Relationship

Innovation New learning Partnerships Future needs

Operational Excellence Admin excellence Network of supplier for Products & services Adaptability

Learning & Growth

Climate for Action Personal Growth

Competencies Functional Excellence Leadership Skills Strategic Readiness

Summarized organizational capability profile for assessing a companys strengths and weaknesses in dealing with opportunities and threats in external environment.

Financial Capability Bajaj - Cash Management LIC - Centralized payment, decentralized collection Reliance - high investor confidence Escorts - Amicable relation with Fis

Marketing Capability Hindustan Lever - Distribution Channel IDBI/ICICI Bank - Wide variety of products Tata - Company / Product Image

Operations Capability Lakshmi machine works - absorb imported technology Balmer & Lawrie - R&D - New specialty chemicals Personnel Capability Apollo tyres - Industrial relations problem

General management capability Malayalam Manorama - largest selling newspaper

Key challenges Rapid growth in employee base fresh and lateral recruits Building knowledge and skill base Ensuring adequate focus on multiple perspectives

Growth, profitability, service levels, building talent. Ensuring consistent implementation of strategy across the organisation Aligning organisational, business-level and individual goals Incentivising achievement of the goals set

Re-defined and expanded financial perspective Growth, market share, profitability and credit costs Introduced customer perspective: concept of service levels as an area of performance evaluation Customer satisfaction scores

 Introduced process perspective: focus on building a process orientation in the organisation. Learning perspective: focus on re-skilling for existing employees and speed-to-job for new recruits.

Reducing the number of scorecard templates Already reduced from 750 to 230 in two years Planned reduction to about 150 The balanced scorecard is a tool that helps communicate strategy and goals across the organisation.

A picture of the more critical areas which can have a relationship of the strategic posture of the firm in the future. Capability Factor Competitive S/ W Finance High cost of capital Marketing Fierce competition,

Operational - excellent - parts & components available. Personnel -Quality of management & personnel par with competition General - High Quality experienced top management - take proactive stance

The model of the Five Competitive Forces was developed by Michael E. Porter An important tool for analyzing an organizations industry structure in strategic processes. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry