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Environmental Appraisal
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Page 1: Environmental appraisal

Environmental Appraisal

Page 2: Environmental appraisal

Chapter Outline

Concept of Environment• Characteristics of environment• External environment• SWOT analysis Components of Environment Environmental Scanning Appraising the Environment

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Concept of Environment

Environment literally means the surroundings, external objects, influences or circumstances under which someone or something exists.

The environment of any organization is “the aggregate of all conditions, events and influences that surround and affect it”.

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Characteristics of Environment

Environment is complex Environment is dynamic Environment is multi-faceted Environment has a far-reaching impact

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External Environment Includes all the factors outside the

organization which provide opportunities or pose threats to the organization.

Internal Environment Refers to all the factors within an

organization which impart strengths or cause weaknesses of a strategic nature.

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SWOT Analysis It is a systematic approach to understanding the

environment. Business firms undertake SWOT analysis to

understand the external and internal environment. It is also known as WOTS-UP analysis. Through such an analysis, the strengths and

weaknesses can be matched with the opportunities and threats operating in the environment so that an effective strategy can be formulated.

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Example: Environmental influences on the instant foods industry

Opportunities

• High demand potential.• Rising personal incomes, emergence of nuclear families and rise in the number of working women.• Availability of packaging material to keep instant foods fresh and unadulterated.• Spread of television as a media for advertising.

Threats

• Problem of acceptability, as Indians are typically used to eat fresh vegetables and foods.• High taxes, as instant foods are considered a luxury item; direct and indirect taxes constitute 70 to 80% of the price of processed foods.• High raw material costs.• High overhead expenses.

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Components of Environment

The macro-environment: PESTLE analysis Political Economic Social/cultural Technological Legal Environmental

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Political FactorsExample: The Janata govt., during the 3-year rule at the centre

after 1977, followed a strict policy with regard to multinationals.

As a result of the socialistic ministers, Coca Cola and IBM were forced to move out of India, causing a far-reaching impact on the business environment within the country.

For instance, a vast market was opened up for indigenous soft drink manufacturers.

The decision to allow Pepsi Cola to set up a plant in Punjab is viewed by many political commentators as a part of the govt. policy to deal with the Punjab problem.

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Social and Cultural FactorsExamples:

Growing consumer assertiveness and intolerance of poor quality.

Growing acceptance of computers and the internet as tools for education, leisure, information gathering, and purchasing goods and services.

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Technological FactorsExample:

In line with its concern for the technological environment, the ICICI has set up the Technology Development Corporation (TDC) to finance ventures that have a high risk but possess potential for growth. The TDC also intends to provide a technology information service facility for industry.

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Legal Factors

Example:

Regulations (known as Basel II) which stipulate that the ratio of reserves to loans on a bank’s balance sheet must not be less than 8%. These standards are set by an international body, the Bank for International Settlements, but national governments choose how strictly to enforce them.

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Environmental Factors

Example:

Global warming, believed by most people to be due to carbon dioxide and other greenhouse gases produced by industrial activity, cars, and other forms of travel.

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Example

Toyota is one of the pioneers. It has developed hybrid petrol / electrical cars that use kinetic energy to charge a battery which is used as a supplement to the normal engine, thus significantly improving petrol consumption and reducing emissions in built-up areas where traffic speeds are slow.

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Environmental Scanning

It is the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business.

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Approaches to Environment Scanning

Systematic approach Ad hoc approach Processed-form approach

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Systematic Approach

Under this approach, information for environmental scanning is collected systematically.

Information related to markets and customers, changes in legislation and regulations that have a direct impact on an organization's activities, govt. policy statements pertaining to the organization's business and industry, etc. could be collected continuously to monitor changes and take the relevant factors into account.

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Ad hoc Approach

Using this approach, an organization may conduct special surveys and studies to deal with specific environment issues from time to time.

Such studies may be conducted when an organization has to undertake special projects, evaluate existing strategies or devise new strategies.

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Processed-form Approach

For adopting this approach, the organization uses information in a processed form available from different sources both inside and outside the organization.

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Sources of Information for Environmental Scanning

Documentary or secondary sources of information like different types of publications.

Mass media Internal sources External agencies Formal studies

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Methods and Techniques Used for Environmental Scanning

Trend analysis Regression analysis The Delphi technique Benchmarking MIS of the firm QUEST (Quick environmental scanning

technique)

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QUEST Proposed by B. Nanus. It is a four-step process which uses

scenario-writing for scanning the environment and identifying strategic options.

1. Strategists make observations about the major events and trends in the industry.

2. Then, they speculate on a wide range of important issues that might affect the future of their organizations by scanning the environment.

3. The QUEST director prepares a report summarizing the major issues and their implications.

4. The report and scenarios are reviewed by the group of strategists who identify feasible strategic options to deal with the evolving environment. The options are ranked and teams are designated to develop strategies.

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Environmental Appraisal Glueck suggested a technique for environmental

appraisal i.e. ETOP (Environmental Threat and Opportunity Profile).

It involves dividing the environment into different sectors and then analyzing the impact of each sector on the organization.

It requires subdividing each environmental sector into sub factors and then the impact of each sub factor on the organization is described in the form of a statement.

A summary ETOP may show the major factors for the sake of simplicity.

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ETOP for a bicycle companyEnvironmental sectors Impact of each sector

Social Customer preference for sports cycles which are fashionable, easy to ride and durable.

Political No significant factor.

Economical Growing affluence among urban consumers; exports potential high.

Legal Bicycle industry a thrust area for exports.

Technological Technological up gradation of industry in progress; introduction of mountain bike and commuter folding bikes.

Environmental Environmental factors such as a renewed interest in healthy lifestyles and the desire to reduce pollution.

Up arrows indicate favourable impact, down arrows (if used) indicate unfavourable impact, while horizontal arrows indicate a neutral impact.

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INDUSTRY ANALYSISMichael Porter’s Five Forces

Model of Competition

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Industry Analysis The purpose of industry analysis is to determine the

industry attractiveness and to understand the structure and dynamics of the industry.

Michael E. Porter has made immense contribution to the development of the ideas of industry and competitor analysis.

He advocates that a structural analysis of industries be made so that a firm is in a better position to identify the strengths and weaknesses.

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It was Michael Porter, who gave a new thrust to the ideas associated with competition.

In his article in the Harvard Business Review “How competitive forces shape strategy” (March-April 1979) Porter emphasized that “Competition” in an industry is shaped not only by “existing contestants” or “the other players” but by certain other forces as well.

Porter has identified five forces that shape the nature and intensity of competition in any industry.

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Industry Competitors: Rivalry

Among Existing

Firms

Potential threat of

substitute products

or services

Buyer’s bargaining

power

Potential threat of

new entrants

Supplier’s bargaining

power

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Threat of New Entrants: 1. New entrants are always a powerful source of

competition.2. The new capacity and product range they bring in

throw up new competitive pressure.3. The bigger the new entrants, the more severe the

competitive effect.4. New entrants also place a limit on prices and

affect the profitability of existing players.

Michael Porter’s Five Forces Model of Competition

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Determinants:

1. Govt. policy2. Access to distribution3. Switching costs4. Brand identity5. Economies of scale

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Threat of Substitute Products:

1. Substitute products is a latent source of competition in an industry.

2. In many cases they become a major constituent of competition.

3. Substitute products offering a price advantage and/or performance improvement to the consumer.

4. They can drastically alter the competitive character of an industry.

5. Substitutes usually limit the prices and profits in an industry.

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Determinants:

1. Relative price performance of substitutes2. Switching costs3. Buyer potential to substitutes

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Bargaining Power of Suppliers:

1. Suppliers exercise considerable bargaining power over companies.

2. The more specialised the offering from the supplier, greater is his clout.

3. The bargaining power of suppliers determines the cost of raw materials and other inputs of the industry and, therefore, industry attractiveness and profitability.

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Bargaining Power of Buyers:

1. The bargaining power of the buyers influences not only the prices that the producer can charge but also influences in many cases, costs and investments of the producer because powerful buyer usually bargain for better services which involve costs and investment on the part of the producer.

2. Determinants:Buyer volume, Buyer information, Ability to backward integrate, etc.

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Rivalry among Existing Competitors:

1. For any player, the competitors influence prices as well as the costs of competing in the industry, in the production facilities, product development, advertising, sales force, etc.

2. Rivalry Determinants:Industry growth, product differences, brand identity, switching goals, exit barriers, corporate stakes, etc.