Ch2 - External environment Flashcards
The strategic analysis is a continuous process which is not without limitations. Explain
There are two major limitations of strategic analysis that we need to be aware of.
First, it gives a lot of innovative options but doesn’t tell which one to pick. The options can be overlapping, confusing or difficult to implement.
Second, it can be time- consuming at times, hurting overall organizational functioning and also strain other efficient innovations such as developing a new product or a service.
What are the Issues to consider for Strategic Analysis
Strategy evolves over a period of time : Strategy is influenced by experience, but it has to be updated when the results become clear. It therefore evolves with time.
Balance of external and internal factors : Strategic analysis necessitates creating a reasonable balance between many and conflicting challenges, because a perfect fit between them is unlikely. Management must consider opportunities, influences, and constraints while taking a strategic decision.
Risk : Competitive markets, liberalization, globalization, booms, recessions, technological advancements, inter-country relationships all affect businesses and pose risk at varying degrees. An important aspect of strategic analysis is to identify potential imbalances or risks and assess their consequences.
Define business environment
The term “business environment” refers to all external factors, influences, or situations that in some way affect business decisions, plans, and operations. Organizational success is determined by its business environment, and even more from its relationship with it. The business environment is highly dynamic and continuously evolving.
There is a close and continuous interaction between a business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively. How does it helps the business ?
It helps the business in the following ways:
i. Determine opportunities and threats: The interaction between the business and its environment would explain opportunities and threats to the business. It helps to find new needs and wants of the consumers, changes in laws, changes in social behaviours, and tells what new products the competitors are bringing in the market to attract consumers.
ii. Give direction for growth: The interaction with the environment enables the business to identify the areas for growth and expansion of their activities. Once the business is aware and understands the changes happening around, it can plan and strategise to have successful business.
iii. Continuous Learning: The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in the realm of business.
iv. Image Building: Environmental understanding helps the business organizations to improve their image by showing their sensitivity to the environment in which they operate. For example, in view of the shortage of power, many companies have set up captive power plants with their factories to meet their own requirement of power as well as extend surplus capacities in the vicinity. Understanding the needs of the environment help to showcase that the business is aware and responsive to the needs. It creates a positive image and helps it to prosper and win over the competitors.
v. Meeting Competition: It helps the businesses to analyse the competitors’ strategies and formulate their own strategies accordingly. The idea is to flourish and beat competition for its products and services.
Define PESTLE.
The term PESTLE is often used to describe a framework for analysis of macro environmental factors.
‘PESTLE analysis is an increasingly used and recognized analytical tool, and it is an acronym for:
P- political E- economic
S- socio-cultural
T- technological L- legal
E- environmental
The advantage of this tool is that it encourages management into proactive and structured thinking in its decision making. The PESTLE analysis is simple to understand and quick to implement.
Characteristics of a global business
To be specific, a global business has three characteristics:
♦ It is a conglomerate of multiple units (located in different parts of the globe) but all linked by common ownership.
♦ Multiple units draw on a common pool of resources, such as money, credit, information, patents, trade names and control systems.
♦ The units respond to some common strategy. Besides, its managers and shareholders are also based in different nations.
The steps in international strategic planning are
♦ Evaluate global opportunities and threats and rate them with the internal capabilities.
♦ Describe the scope of the firm’s global commercial operations.
♦ Create the firm’s global business objectives.
♦ Develop distinct corporate strategies for the global business and whole organization.
Why do businesses go global?
♦ The first and foremost reason is the need to grow. It is basic need of every organisation. Often finding opportunities in the other parts of the globe, organisations extend their businesses and globalise their operations.
♦ There is rapid shrinking of time and distance across the globe, because of faster communication, speedier transportation, growing financial flow of funds and rapid technological changes.
♦ It is being realised that the domestic markets are no longer adequate. The competition present domestically may not exist in some of the international markets.
♦ There can be varied other reasons such as need for reliable or cheaper source of raw-materials, cheap labour, etc. Many foreign businesses shift and set up some of their operations to take advantage of availability of vast pool of talent.
♦ Companies often set up overseas plants to reduce high transportation costs. It may be cheaper to produce near the market to reduce the time and costs involved in transportation.
♦ When exporting organisations find foreign markets to open up or grow big, they may naturally look at overseas manufacturing plants and sales branches to generate higher sales and better cash flow.
♦ The rise of services to constitute the largest single sector in the world economy; and regional economic integration, which has involved both the world’s largest economies as well as certain developing economies.
♦ The apparent and real collapse of international trade barriers redefines the roles of state and industry. The trend is towards increased privatization of manufacturing and services sectors, less government interference in business decisions and more dependence on the value-added sector to gain marketplace competitiveness. The trade tariffs and custom barriers are getting lowered, resulting in increased flow of business.
♦ Globalization has made companies in different countries to form strategic alliances to ward off economic and technological threats and leverage their respective comparative and competitive advantages.
What is product
Businesses sell products. A product can be either a good or a service. It might be physical good or a service, an experience.
Products are either tangible or intangible.
Product has a price.
Products have certain features Product is pivotal for business.
A product has a useful life.
What is PLC?
Product Life Cycle. PLC is an S-shaped curve which exhibits the relationship of sales with respect of time for a product that passes through the four successive stages of introduction, growth, maturity and decline.
The first stage of PLC is the introduction stage with slow sales growth, in which competition is almost negligible, prices are relatively high, and markets are limited. The growth in sales is at a lower rate because of lack of awareness on the part of customers.
The second phase of PLC is growth stage with rapid market acceptance. In the growth stage, the demand expands rapidly, prices fall, competition increases, and market expands. The customer has knowledge about the product and shows interest in purchasing it.
The third phase of PLC is maturity stage where there is slowdown in growth rate. In this stage, the competition gets tough, and market gets stablised. Profit comes down because of stiff competition. At this stage, organisations have to work for maintaining stability.
In the fourth stage of PLC is declines with sharp downward drift in sales. The sales and profits fall down sharply due to some new product replaces the existing product. So, a combination of strategies can be implemented to stay in the market either by diversification or retrenchment.
What is value chain analysis
Value chain analysis is a method of examining each activity in value chain of a business in order to identify areas for improvements. When you do a value chain analysis, you must analyse how each stage in the process adds or subtracts value from the end product or service.
One of the key aspects of value chain analysis is the recognition that organizations are much more than a random collection of machines, material, money and people. These resources are of no value unless deployed into activities and organised into systems and routines which ensure that products or services are produced which are valued by the final consumer/user. In other words, it is these competences to perform particular activities and the ability to manage linkages between activities which are the source of competitive advantage for organizations. Porter argued that an understanding of strategic capability must start with an identification of these separate value activities.
The primary activities of the organization are grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service.
Each of these groups of primary activities are linked to support activities. These can be divided into four areas; Procurement, Technology development, Human resource management, and infrastructure.
How can the strategists use the five-forces model to determine what competition is like in a given industry.
by undertaking the following steps:
Step 1: Identify the specific competitive pressures associated with each of the five forces.
Step 2: Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate to normal, or weak).
Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits.
