Environmental Analysis Techniques & Impact for Organization Growth

1. Environmental Analysis Techniques & Impact for Organization Growth Facilitator and Course Coordinator: Vinayshil Gautam PhD, FRAS(London) (Founder Director IIM K; Leader Consulting Team IIM S) A Al_Sager Chair Professor and First Head, Management Department, IIT D Chairman, DKIF

2. Organization's Environment Environment has been traditionally defined as all that is outside the boundary of an organization. Like.. • Customers • Vendors • Competitors • Regulatory Agencies • Financial Institutions • But they are not mutually exclusive as environment does seep into the organization through all that enters it… • Through the workforce • In terms of quality of the raw material procured

3. The Important QuestionWhy is it important to understand future external influence on an organization? • The pace of the technological change e.g. the use of robots in manufacturing • Speed of global communications is becoming faster e.g. Offshoring of work

4. Understanding the Nature of Environment One of the main concerns in environment analysis is coping with uncertainty.Thus it is important to understand how uncertain the environment is and why ?

5. Environmental uncertainty is based on three types of situations • Simple/Static • Dynamic • Complex

6. Simple/Static Situation • The environment is relatively simple to understand and not undergoing any significant change. • Technological processes may be simple and markets fixed over time e.g. raw material suppliers, mass manufacturing companies

7. Dynamic Situation • Managers need to consider the environment of the future, not just the past. • This can be done intuitively or through a structured method like scenario planning. e.g. Ford is actively engaged in development of promising future alternatives like Hydrogen fuel cells.

8. Complex Situation • The environment is difficult to comprehend. • With more and more sophisticated technology, there is an increasing move towards the conditions of highest uncertainty. e.g. Intel vs AMD

9. External Factors that influence change fall into four categories Fiscal Policies Market Factors Labour Technological innovations

10. Fiscal Policies • Interest Rate • Exim Policies • Taxation Structure • Inflation • Currency Rate

11. Market Factors • Customers eg. Mc Donald's • Competition eg. Pricing strategies of Pepsi and Coke • Type of the market eg.Ford Aston Martin vs. Taurus

12. Labour • Skill level of employees I.T. industry in India • Cultural diversity • Influx of more and more ex-pats as well as NRI shows growing opportunities in India while declining opportunities in their motherland.

13. An example here is the organizational change that took place at McDonnell Douglas US government being one of its major customers, the company was particularly sensitive to defense spending and international relations. At the end of the cold war with significant cuts in defense budget and reduced demand for military aircraft by the US Air Force, it resulted in losses of about $383 mn. This resulted in selling of some of the business and reduced its workforce by almost 50,000.

14. Technological Innovation Technological innovation in the context of organizational change – • May be narrowly defined and referred to something as specific as a chemical process that creates a certain product. • May be very broadly defined as the general way in which an organization carries out tasks such as the use of robotics in manufacturing.

15. Organizational change is influenced by three features of technological progress First.. • A point of saturation is reached with the present technology.No further program can be made by the use of present technology. e.g. chip manufacturers like Motorola and Intel can face a problem when they can add no more devices on the silicon chips.

16. Second.. • Technological innovation and progress follows a very distinctive pattern known as the S-curve. • Products that have already undergone considerable technological progress—such as video recorders,cars– will not change dramatically in the future. • These products will be replaced by something technologically different-like CD.s have replaced cassettes.

17. Third.. • At reaching top of the S-curve a transition takes place where one technology is reaching its upper limit and the new technology is just developing. • eg. Change from friction based rail tracks to frictionless magnetic levitation tracks. • This period of transition is known as discontinuity.

18. What is PEST Analysis? PEST analysis is very important tool through which an organization considers its environment and influences there of particularly in past, the extent to which the changes occurring are significant for future. The organization is made up of following key environments: • 1. The internal environment e.g. staff (or internal customers), office technology, wages and finance, etc. • 2. The micro-environment e.g. our external customers, agents and distributors, suppliers, our competitors, etc. • 3. The macro-environment e.g. Political (and legal) forces, Economic forces, Sociocultural forces, and Technological forces. These are known as PEST factors

19. PEST Analysis in an overall Environment

20. Importance of PEST Analysis • PEST Analysis ( or sometimes called as STEP analysis) is a simple but important and widely-used tool that helps you to understand the big picture of the environment comprising of • Political • Economical • Socio-Cultural • Technological • environments you are operating in. PEST is used by business leaders worldwide to build their vision of the future.

21. It is important for the following main reasons:·         Firstly, by making effective use of PEST Analysis, you ensure that what you are doing is aligned positively with the powerful forces of change that are affecting our world. By taking advantage of change, you are much more likely to be successful than if your activities oppose it;Secondly, good use of PEST Analysis helps you avoid taking action that is doomed to failure for reasons beyond your control; andThirdly, PEST is useful when you start operating in a new country or region. Use of PEST helps you break free of unconscious assumptions, and helps you quickly adapt to the realities of the new environment.

22. How to use the tool: PEST is a simple mnemonic standing for Political, Economic, Socio-Cultural and Technological.

23. Usingthe tool is a three stage process: • Firstly, you brainstorm the relevant factors that apply to you; • Secondly, you identify the information that applies to these factors; and • Thirdly, you draw conclusions from this information.

24. Political Environment : • Government type and stability • Freedom of press, rule of law and levels of bureaucracy and corruption • Regulation and de-regulation trends • Social and employment legislation • Tax policy, and trade and tariff controls • Environmental and consumer-protection legislation • Likely changes in the political environment

25. Economic Environment : • Stage of business cycle • Current and project economic growth, inflation and interest rates • Unemployment and labor supply • Labor costs • Levels of disposable income and income distribution • Impact of globalization • Likely impact of technological or other change on the economy • Likely changes in the economic environment

26. Socio-Cultural: • Population growth rate and age profile • Population health, education and social mobility, and attitudes to these • Population employment patterns, job market freedom and attitudes to work • Press attitudes, public opinion, social attitudes and social taboos • Lifestyle choices and attitudes to these • Socio-Cultural changes

27. Technological Environment: • Impact of emerging technologies • Impact of Internet, reduction in communications costs and increased remote working • Research & Development activity • Impact of technology transfer

28. Key Points: • PEST Analysis is a useful tool for understanding the “big picture” of the environment in which you are operating, and the opportunities and threats that lie within it. By understanding your environment, you can take advantage of the opportunities and minimize the threats. • PEST is a mnemonic standing for Political, Economic, Social and Technological. These headings are used firstly to brainstorm the characteristics of a country or region and, from this, draw conclusions as to the significant forces of change operating within it. • This provides the context within which more detailed planning can take place to take full advantage of the opportunities that present themselves.

29. PORTER’S DIAMOND

30. PORTER’S DIAMOND – An Overview • Developed by Michael Porter, a famous Harvard professor. • Porter believes that classical theories on comparative advantage of firms are inadequate (even wrong). • A nation can be competitive only if its firms are competitive and innovative.

31. The ”Diamond” FIRM STRATEGY, STRUCTURE, AND RIVALRY FACTOR CONDITIONS DEMAND CONDITIONS RELATED AND SUPPORTING INDUSTRIES

32. FACTOR CONDITIONS • Factor conditions are the inputs used by a firm. • Two types – 1. key factors • 2. non-key factors • Porter argues that a lack of resources often actually helps countries to become competitive. Abundance generates waste and scarcity generates an innovative mindset.

33. DEMAND CONDITIONS • a sophisticated domestic market is an important element to producing competitiveness. • If the nation’s discriminating values spread to other countries, then the local firms will be competitive in the global market.

34. RELATED AND SUPPORTING INDUSTRIES • a set of strong related and supporting industries is important to the competitiveness of firms.

35. FIRMS – STRATEGY, STRUCTURE AND RIVALRY • STRATEGY 1. CAPITAL MARKETS 2. INDIVIDUALS’ CAREER CHOICE Individuals base their career decisions on opportunities and prestige. A country will be competitive in an industry whose key personnel hold positions that are considered prestigious.

36. CONTD. • STRUCTURE The best management styles vary among industries. Some countries may be oriented toward a particular style of management. Those countries will tend to be more competitive in industries for which that style of management is suited. • RIVALRY Intense competition spurs innovation.

37. PORTER’S DIAMOND - CRITICISMS • Porter developed this paper based on case studies and these tend to only apply to developed economies. • Porter argues that only outward-FDI is valuable in creating competitive advantage, and inbound-FDI does not increase domestic competition significantly. • The Porter’s diamond is influenced by factors outside the home country.

38. What are Scenarios? • Scenarios are internally-consistent stories of possible futures. What would we do if this scenario came about? (Arie de Geus former head of Planning for the Shell Group) • Scenario thinking (planning) is not about predicting the future, and surprisingly enough, not about choosing the best way forward, though indeed a powerful and invaluable tool which helps this. Its primary value lies in the development of new faculties for improving decision making in those that practice it regularly.... (Galt et al – Idon scenario thinking)

39. Scenarios…contd. • Scenario planning is about making choices today with an understanding of how they might turn out.... Using scenarios is rehearsing the future. You run through the simulated events as if you were already living them. You train yourself to recognise which drama is unfolding. That helps you avoid unpleasant surprises, and know how to act. (Peter Schwarz – The Art of the Long View) • Scenarios are not predictions. Rather they help us visualise different possibilities, take account of inherently unpredictable events. (Global scenarios for the 21st Century)

40. Characterisation of scenarios planning process • There are an infinite number of scenarios • Identify the question - strategic intent • Identify main driving forces - • Select two scenario axis • – make them significantly different – take the extremes

41. Requirements of Scenarios • consistent and robust • coherent • possible and probable • provide structured understanding and • plausible. • defensible.

42. The use of Scenarios • As a pedagogical tool, getting executives to think outside the box. • But not when : • scenarios are used as the basis for decision making • scenarios are used to rehearse the future • the dynamics can be so complex that even slight differences in the drivers can result in large consequences.

43. References • Organization Management Handout, By Prof. VinayshilGautam. • Diagnosing Organizations-Michael I. Harrison. Second Edition, Sage Publications, 1994. • Organizational Environments-John W. Meyer & W. Richard Scott. Updated Edition, Sage Publications, 1992. • www.Businessballs.com • www.Quickmba.com/strategicmanagement/ • www.Pacific.usb.uk