How would you adapt to the forces of the environment?

Given the myriad issues, problems and opportunities in an organization’s

environment, the important task of the CEO is to manage the forces of the
environment. Each organization must assess its unique situation and then adapt to
the environment according to the wisdom and experience of the top management.
The organizations adapt to their environment through a mechanism which are as
follows:

1. Information management: One way organizations adapt to their environment is

through information management. It is important for initial understanding of the
environment and monitoring the signs of changes in the environment. This is
done by relying on boundary spanners who are representatives or purchasing
agents of the company. They work in the field and know what other
organizations are doing. Thus information can be gathered from outside as well
as from own MIS division to scan the environment effectively.

2. Strategic response: Another way to adapt to environment is through a strategic

response. Options include maintaining status quo, altering strategy a bit or
adopting an entirely new strategy. If market if growing heavily then invest heavily
on products and services. If the growth is slow then cut back.
3. Mergers, acquisitions and alliances: A related strategic approach to adapt to
environment involves mergers, acquisitions and alliances. Mergers occur when two or
more firms combine to form a new firm.
Acquisitions occur when one firm buys another, sometimes against its will (hostile
takeover).
In case of alliances, the firm undertakes a new venture with another firm. This is
done for easy entry in a new market or expansion in the current market.
4. Flexibility in the organizational design: An organization may also adapt to
environmental conditions by incorporating flexibility in the organizational design. When
uncertainty is at low level, then the firm may choose a structure with many basic rules
and regulations. But when the environment is uncertain then the firm chooses a
flexible design allowing the manager considerable discretion and flexibility over
decisions. The former is called the mechanistic while the latter is called organic
design.
5. Direct influence on the environment: Organizations are not necessarily helpless
in the face of the environment . The organization may influence the environment in
many ways.
6. Management : Managers should remember that their organization is influenced by
a wide array of forces and elements in the external environment . These forces and
elements are uncontrollable and controllable and also are predicable and
unpredictable. In this case the management can adapt to environment by formulating
more than one strategy.
How would you mitigate threats arising from different sectors of the environment?

The sectors of the environment are Socio-economic sector, Technological

sector ,Supplier sector, Competitor sector, Government sector, Customer sector,
Ecological sector. To mitigate the threats the following courses can be taken:

1. Socio-economic Sector: The forces in this sector are economy, geography,

demography and social factors.
a. The economy of a country is to some extent uncontrollable but the business firm
can influence the economy by lobbying with the government. For example, the
interest rate and the tax rate may be lowered by the government and the volume
of business activity can be increased. The revaluation policy may also be
influenced by the business firms.

b. Geography : If geographical conditions are detrimental to business then the

business can be shifted to other geographical areas.

c. Demography: This factor is uncontrollable by the business firms. Only the change
in the population may to some extent be influenced with the help of the
government. In this case the strategist should search for growing area.

d. Social : Social values, attitudes, cultures and beliefs can influence the volume of
business of a business firm. Those threats can be made favorable by changing
the attitudes, beliefs and value systems of the customers.
2. Technological Sector: The threat arising from the technological sector can be
encountered by investing more money on research and development which will
help the firm to invest new products and improved products. Also the strategist
should develop skills to foresee advancement in technology and its impact on
the achievement of objectives.

3. Supplier Sector: The threats from the supplier sector can be mitigated by :
(a) vertically integrating with the supplier;

(b) searching for alternative supplier;

(c) By signing long-term contracts with the supplier at fixed price as hedge against
inflation.

(d) By owning some firms that produce the goods it sells or uses as raw material.
4. Competitor Sector: The threats from the competitor sector can be

mitigated by:
a. Lowering the price;
b. Increasing the quality of products;
c. Innovating new products;
d. Reacting to competitors’ actions;
e. Identifying the weak points of competitors;
f. Increasing warranty period.
5.Government Sector: The most influencing agent in the environment is the
Government which can be handled by :
(a) Lobbying with the Government for not competing with the business firms ;
(b) Influencing the passing of regulations
(c) Requesting to reduce the tax rates;
(d) Requesting to give subsidy
(e) Requesting to purchase goods/services
(f) Requesting to reduce import duty;
(g) Requesting to change policy in favour of increasing business activity;
(h) Requesting to protect from unfair foreign competition.

6.Customer Sector: The threat arising from this sector can be mitigated by:
(a) Producing goods according to customers’ choice and preferences;
(b) Refraining from producing harmful goods that have side-effects.
(c) Increasing warranty ,service .

7. Ecology: Relationship between human beings and other living things and the air ,
soil and water that support them is called ecology. Threats from the ecological
sector can be removed by :
Producing useful goods ;
Reducing resource consumption ;
Reduce pollution to the extent socially acceptable and technically feasible
Acquire pollution control equipment
Abide by the rules of pollution control
Techniques of environmental Analysis and Diagnosis:

The strategist predicts the future through forecasting for diagnosing the
environment

The analysis is done by means of a search of verbal and written information,

spying, forecasting and formal studies and MIS.

1. Gathering of information: Both verbal and written information are gathered.

Verbal information is gathered form hearing radio, TV, employees,
subordinates, supervisors. Outsiders include customers, suppliers,
wholesalers, retailers, competitors, investors, government and university
employees.

Written information is gathered from newspapers, trade journals, industry

newsletters and general publications and clipping services, and business
guides.

2. Develop MIS: Strategist can also analyze the environment by gathering

information from the MIS division. Some experts feel that the information from
MIS is limited ,untimely and unreliable.
3. Spying: The 3rd technique of gathering information about
environmental analysis is spying. The spy can be a customer,
supplier, or employee of the competitor or professional spy.

4. Formal forecasting: A fourth approach to analyzing the

environment is formal forecasting which is done by corporate
planners or consultants at the request of top management.
These specialist consultants are called futurists.

5. Polling: This is a process of getting reports for money about

social attitudes about the economy, governments, its products
and so on. Then analysis is done with these reports.
Characteristics of Strategists:

A large number of characteristics of the strategist determine how well and

whether the strategist diagnoses opportunities in and threats from the
environment. The characteristics are discussed below:

1. Experience: The more relevant experience the executive has, the

greater the tendency to do a more accurate and higher quality diagnosis.
Experience is connected with age. The more experience and more
intelligent the strategist, the more accurate is the diagnosis.

2. Motivation or Aspiration level: The higher the aspiration level- in other

words, the more motivated the executive is, the better the diagnosis.
Motivation is affected by the strategist’s need for achievement, affiliation,
power and reward for performance. Diagnosis may not be effectively done if
the rewards are based on short-run actions and results. It should be based
on long-run actions and results.

3. Perceptual Modes: The perceptual modes about the environment are

based on strategist’ perceptions structured on predispositions for dealing
with uncertainty of information. This affects the quality of diagnosis.
4. Risk orientation: Persons who are risk aversive will do conservative
diagnosis.

5. Reflectiveness: Some executives use small amount of information

and diagnose quickly. More reflective approach would lead to a more
effective diagnosis.

6. Dogmatism: Executives who have closed- belief systems, ‘whose

minds are made up’ make rapid diagnosis using inadequate information.
Some executives are so dogmatic that they ignore the environment, or
believe it to be more stable than it actually is. To have a good diagnosis a
devil’s advocate is required.

7. Abstract Conceptual Structure: Persons with abstract conceptual

structures possess many dimensions of information. This leads to quality
diagnosis.

8. Psychological Model: The mood of the strategist at the time of

diagnosis affects the quality of diagnosis. If he is in a good mood then he
will be optimistic and vice versa. The mood is affected by the chemistry of
the brain and actual experience at home and at work. Problems in private
life can also affect the quality of the diagnosis.
Strategic Advantage Analysis and Diagnosis :
Strategic advantage analysis and diagnosis is the process by which the
strategists examine the firm’s marketing and distribution, research and
development, production and operations, corporate resources and finance and
accounting factors to determine where the firm has significant competencies so it
can most effectively exploit the opportunities and meet the threats the
environment is presenting.
No firm is equally strong in all its functions. Procter and Gamble is known for its
superb marketing. Maytag is known for its outstanding production and product
design. American Telephone and Telegraph is known for its outstanding service
and personnel policies. Yet each of these firms is not strong “across the board.”
Within a company, each division has varying strengths and weaknesses. General
Electric was strong in jet engines and weak in computers a few years age.
General Motors is stronger in market control in automobiles than it was when it
was in appliances. So,a firm must determine what its distinctive competencies
are- what makes it unique to the competitive arena –so that it can make decisions
about how to use these abilities now and in the future.
Unless the executives are fully aware of their strategic advantages, they may not
choose the one opportunity of the many opportunities available at the time that is
likely to lead to the greatest success. Unless they regularly analyze their
weaknesses, they will be unable to face the environmental threats effectively. In
effect, these assessments must be combined with environmental analysis so that
decisions can be made about how to use or add strengths and minimize
weaknesses.
We shall now focus on how to analyze the strategic factors realistically and
diagnose their significance. It is at this point that executives can develop a strategic
advantage profile (SAP) and match it with an environmental threat and opportunity
profile (ETOP) to create optimal conditions for adjusting or changing strategies or
policies.
Now we shall examine the strategic advantage factors that management analyzes
and diagnoses to determine the internal strengths and weaknesses with which it
must face the opportunities in and threats from the environment.

The strategic Management Process

Analysis and Diagnosis Choice Implementation Evaluation
(Chapter 3) (Chapter 4) (Chapter 5) (Chapter 6) (Chapter 7) (Chapter 8)

Enterprise
Strategic Environmenta Internal Consider Choose Resource Policies Evaluation
Strategists
Managemen l Competitive Alternative the s And of Results
t Elements Threats and Advantages Strategies Strategy and Administration and
Opportunities Structure strategy
Enterprise (Chapter 9)
Objectives

To determine To search the To Examine To ensure that To allocate To match To ensure that
goals and environment and diagnose the most resources and functional strategy and
values of key and diagnose the firm’s appropriate organize to policies and implementation
decision the impact of strengths and strategy is chosen match the administrative will meet
makers and significant weaknesses strategy style with objectives
the firm factors strategy
 Exhibit
In the discussion of these factors, it is not possible to consider the material
presented in courses such as marketing management and personnel and labor
relations in depth. All that will be attempted here is a listing of the most crucial
strategic advantage factors and a presentation of brief illustrations of the strategic
advantages (and weaknesses) that are possible. The order of discussion does not
indicate importance- it is just a convenient ordering of line and staff factors and
follows a fairly typical budgeting format. But you should remember that each area
interacts with the others.

A. MARKETING AND DISTRIBUTION FACTORS:

Exhibit 4.3 is a list of the marketing and distribution factors. The strategist is looking to
see if the firm is substantially and strategically stronger in marketing and
distribution than its competitors.
Some firms are strong in the market, and this provides them with a strategic
advantage in launching new products and services and in defending and
increasing their market share on present products and services.
As you look at the factors, you will see that strength can come from a variety of
approaches. The operational marketing questions of segmentation, positioning,
and mix (product, price, promotion, distribution) are quite important to the firm’s
ability to compete effectively. Of course, firms, compete on any and all of these
factors. Some firms prefer approaches involving low process, lower quality, more
promotion, and wide distribution; others prefer orientations toward higher prices,
higher quality, and custom design.
An assessment of the weaknesses in relation to market potential also suggests
areas where improvements can be made. For instance, if there appears to be a gap
in the product line, new-product development or acquisition is called for to fill out the
existing line or create new ones. A gap in distribution might lead to efforts to build
intensity, exposure, or coverage. If usage gaps exist, price or promotion can lead to.

STRATEGIC ADVANTAGE FACTORS: MARKETING AND DISTRIBUTION

1. Competitive structure and market share: To what extent has the firm

established a strong market share in the total market or its key submarkets?

2. Efficient and effective market research system.

3. The product-service mix: quality of products and services.

4. Product-service Line: Completeness of product- service line and product-service

mix; phase of life cycle the main products and service are in.

5. Strong new-product and new-service leadership.

6. Patent protection (or equivalent legal protection for services)

7. Positive feelings about the firm and its products and services on the part of the
ultimate consumer.

8. Efficient and effective packaging of products (or the equivalent for services).

9. Effective pricing strategy for products and service.

10. Efficient and effective sales force: close ties with key customers. How
vulnerable are we in terms of concentrating on sales to a few customers?

11. Effective advertising: Has it established the company’s product or brand image
to develop loyal customer?

12. Efficient and effective marketing promotion activities other than advertising.

13. Efficient and effective service after purchase.

14. Efficient and effective channels of distribution and geographic coverage,

including internal efforts.
B. Research and Development & Engineering Factors:
The r&d (research and development) and engineering function can be a strategic
advantage for two prime reason: (1) it can lead to new or improved products for
marketing, and (2) it can lead the development of improved manufacturing or
materials processes to gain cost advantages through efficiency (which could help
to improve pricing policies or margins). Exhibit 4.5 presents the list of factors which
might be analyzed in the R&D and engineering area.
We know that a major technological change often occurs outside the immediate
industry. Even so, research and development can provide significant strength for
the ongoing business.
STRATEGIC ADVANTAGE FACTORS: R&D AND ENGINEERING:
1. Basic research capabilities within the firm.
2. Work environment suited to creativity and innovation
3. Development capability for product engineering
4. Excellence in product design
5. Well equipped lab and testing facilities.
6. Ability of unit to perform effective technological forecasting.
The actual improvement in time will vary, but under uncelebrated conditions, the
normal gap between a research breakthrough and commercialization is about
25 years.
 A COMPARISON OF OFFENSIVE AND DEFENSIVE R&D APPRACHES

Defensive
Offensive
Products or processes Dramatically new ones Improvement of
Production design Flexible and existing ones
Volume responsive Rigid, with efficiency
Implementation Less emphasis on cost goals
Timing per unit High-volume emphasis
Environment New divisions or new Existing structures
firms Immediate impact
Longer term React-Adjust R&D to
Proact- Use R&D to needs forecasted
achieve change suited
to your
A firm can choose to pursue anresearch
offensive approach to R&D or pursue
defensive “fast second” or “imitator” approaches.

C. PRODUCTION AND OPERATIONS MANAGEMENT FACTORS:

Exhibit 4.9 lists the strategic advantage factors for production and operations
management.
Your exposure to production and operations management provided you with tools to
help you decide how a firm can improve with regard to factors 9 to 12. An example
of weaknesses in Exhibit 4.10 suggests how serious operations problems can be.
Thus the development of careful production planning and control systems,
productivity improvements, programs, and plant capacity and location decision can
lead to important competitive advantages for a firm. If a firm can produce at a lower
cost, has the capacity to handle business when others can’t or can get raw
materials at favorable prices.
STRATEGIC ADVANTAGE FACTORS: PRODUCTION AND OPERATIONS
MANAGEMENT

1. Lower total cost of operations compared with competitors total costs

2. Capacity to meet market demands
3. Efficient an effective facilities
4. Raw materials and subassemblies costs
5. Adequate availability of raw materials and subassemblies
6. Efficient and effective equipment and machinery
7. Efficient and effective offices
8. Strategic location of facilities and offices
9. Efficient and effective inventory control systems
10.Efficient and effective procedures: design, scheduling, quality control
11. Efficient and effective maintenance policies
12. Effective vertical integration
D. CORPORATE RESOURCES AND PERSONNEL FACTORS
Exhibit 4.11 lists a set of corporate resources and personnel factors which can
provide strategic advantages for a firm. Each of the factors can add to the ability of a
firm to achieve its objectives. Some firms are well known for these factors. General
Electric, for example, has advantages with regard to most of them.
Some firms have attracted and held high-quality, highly productive, and loyal
employees and managers. IBM, Texas Instruments and other firms are known for
this. Since these people make the decisions for all functions, this can be a crucial
advantage. Many firms have purchased other firms just to get their top-quality
managerial, professional, and other employees.
STRATEGIC ADVANTAGE FACTORS: CORPORATE RESOURCES AND
PERSONNEL

1. Corporate image and prestige.

2. Effective organization structure and climate.
3. Company size in relation to the industry (barrier to entry)
4. Strategic management system.
5. Enterprise’s record for reaching objectives: How consistent has it been? How well
does it do compared with similar enterprises?
6. Influence with regulatory and governmental bodies.
7. Effective corporate-staff support systems.
8. Effective management information and computer systems.
9. High-quality employees.

10. Balanced functional experience and track record of top management: Are
replacements trained and ready to take over? Do the top managers work well
together as a team?

11. Effective relations with trade unions.

12. Efficient and effective personnel relations policies: staffing, appraisal and
promotion, training and development, and compensation and benefits.

13. Lower costs of labor (as measured by compensation, turnover, and

absenteeism).

E. FINALCE AND ACCOUNTING FACTORS

Exhibit 4.13 lists some of the major strategic advantage factors in finance and
accounting. The appendix to this chapter provides a summary of financial
analyses which can be done to help you assess this area.
One objective of the analysis is to determine if the focal firm stronger financially
than its competitors (exhibit 4.13 factors 1) can it hold longer or compete more
effectively because it has the financial strength to do so? Let’s consider some
examples.
STRTASTEGIC ADVANTAGE FACTORS: FINANCE AND ACCOUNTING

1. Total financial resources and strength

2. Low cost of capital in relation to the industry and competitors because of stock
price and dividend policy

3. Effective capital structure, allowing flexibility in raising additional capital as

needed; financial leverage

4. Amicable relations with owners and stockholders

5. Advantageous tax conditions

6. Efficient and effective financial planning, working capital, and capital budgeting
procedures

7. Efficient and effective accounting systems for cost, budget and profit planning,
and auditing procedures

8. Inventory valuation policies.

Ratio : A ratio is simply one number expressed in terms of another. It is simply a
relationship between two figures. It is used to judge the financial health of a
business firm. There are four basic groups of financial ratios:
a) Liquidity
b) Leverage
c) Activity
d) Profitability
1. Liquidity Ratios: Liquidity ratios are used as indicators of a firm’s ability to meet
its short-term obligations. Liquidity ratios consists of :
Current Ratio : Current ratio is calculated by the following formula :
Current Assets
Current Liabilities
A large current ratio is not necessarily a good sign; it may mean that the
organization is not making the most efficient use of assets. The optimum current
ratio may vary from industry to industry, with the more volatile industries requiring
higher ratios.
B. Quick Ratios: Quick ratio is calculated by the following formula :
Current Assets-Inventory
Current Liabilities
Since the inventory is excluded from the current assets, the quick ratio accurately
assesses the firm’s liquidity. Though the norm is 1 the stable industries may
safely operate with a lower ratio.
2. Leverage Ratio: Leverage Ratios identify the source of a firm’s capital—
owners’ and outside creditors. The term ‘leverage’ refers to the fact that using
capital with a fixed interest charge will amplify either profits or losses in relation to
the equity of holders of common stock.
A. Total Debts to Total Assets : Total Debts to Total Assets is computed by
the following formula :
Total Debt
Total Assets
This ratio is a measure of the percentage of total funds provided by debt. A TD-
TA ratio higher than 0.50 is safe for stable industries.

B. Long-Term Debt to Equity:

This ratio of long-term debt to equity is a measure of the extent to which sources
of long-term financing are provided by creditors. This ratio is computed by the
following formula: Long-Term Debt
Equity
 3. Activity Ratio: Activity Ratios indicate how effectively a firm is using its
resources. By comparing revenues with the resources used to generate
them , it is possible to establish an efficiency of operation .

1. Asset Turnover Rate : This ratio is computed by the following formula:

Sale
Total Assets
The Asset Turnover ratio indicates how efficiently management is employing
total assets.

2. Fixed Asset Turnover : This ratio is computed by the following formula:

Sale
---------------------
Net Fixed Assets
This ratio of sales to fixed assets is a measure of the turnover on plant and
equipment. It is calculated by dividing the sale by net fixed assets. Industry
figures for Asset Turnover vary with capital intensive industries. Industries
requiring higher inventory will have much smaller inventory ratio.
3. Inventory Turnover Ratio:
Cost of Goods Sold
Average Stock
Norm for US industries is 9. This ratio depends on what type of stock the firm
holds. If the stock consists of first moving inexpensive items then the Turnover
Ratio will be high.

4. Accounts Receivable Turnover : Sale

Accounts Receivable
Accounts Receivable is a measure of the average collection period on sales . A
too low ratio would indicate a loss of sales due to restrictive credit policy. If the
ratio is too high, too much capital is tied up in A/R and the chance of bad debt is
high.

5. Average Collection Period: 360

A/R Turnover

6. Operating Ratio : This ratio shows how much of the total sales is eaten up by
the expenses. The formula is :
Cost of Sales .
Sales

It shows how much of the sales are required to cover operating expenses.
Profitability Ratios: Profitability is the net result of a number of policies and
decisions chosen by an organization’s management. Profitability ratios indicate
how effectively the total firm is being managed. The profitability
ratios are :

A. The Net Profit Margin: It is calculated by dividing net margin by the sales .
Formula : Net Earnings
Sales
10% to 15% is considered normal.

B. Return on Investment/ROI: It indicates how much the company has earned on

total assets .
Formula: Net Earnings
Total Assets

C. Net Earnings to Net Worth :This ratio is a measure of the rate of return or
profitability on the stockholders’ investment .The formula of computing the ratio is
: Net Earnings
Net Worth

D. Earnings Per Share : Net Income

No of shareholders outstanding

This ratio indicates how much profit is earned per share.