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The General Environment

Strategic Management
The General Environment

• The external environment facing the organization


consists of:
• General environment
• Competitive environment

• The changes that occur in the general environment


transcend organizations and industries

• General Environment is also referred to as the macro-


environment

• The competitive environment consists of the industry


and markets in which an organization competes
The General Environment

• The figure shows the


relationship between the
organization and its
external environment

• Other things being


equal, it is the competitive
environment that has
the greatest impact on
the organization
The General Environment
• Organizations must scan and monitor their external environment to
discern weak signals

• Weak signals refer to barely perceptible changes in the


external environment whose impact has yet to be felt

• Once weak signals are identified they must be monitored to


see if they might transform into a trend that can impact the
organization
Example-Firms in the typewriter industry would have to scan the general
environment for technological advancement.
Example-Sony Walkman,CD Players
•Dell and Amazon have taken advantage of the internet to change the way
established products are customised and delivered to the consumers.
• The uneven rate of change in the external environment
leads to discontinuities
Discontinuities have the potential to undermine how
organizations compete
The General Environment

• Scanning and Monitoring the environment constitutes Macro-


Environmental Analysis.
•It can act as an early warning system by giving companies time to
anticipate opportunities and threats to develop appropriate responses
•Its aim is to help the company in looking at trends in the general
environment which may impact its industry and markets.
•The company is then able to formulate a strategy and use its internal
resources and capabilities to position itself to exploit opportunities as
they arise.
•The strategy can also act to reduce the effect of any threats.
Scanning The Environment

• Extreme pace of change in the external environment makes it


imperative for companies to monitor external trends on a continuous
basis.
•Past performance is no guarantee of future trends due to uneven
changes and discontinuities.
•Attempts to forecast the future are fraught with uncertainty.
•Mercer (1998) suggests 3 goals for analysis of the general
environment-
1.Understanding of current and potential changes taking place in the
environment.
2.Intelligence for strategic decision making
3.Foster and facilitate strategic thinking within the organisation
Monitoring The Environment

• The weak signals need to be monitored to get an understanding of


the resulting patterns.
•Monitoring enables an organisation to see how the general
environment trends impact its competitive environment.
•Scanning is broad in scope while monitoring is focussed.
•Both scanning and monitoring are inseperable and go hand in hand
•Example-One way in which companies may monitor weak signals is
to set thresholds.In such a case activities above the threshold can be
monitored.
The General Environment

• Disciplined methord for imagining possible futures


• Scenario planning is an internally consistent
view of what the future might turn out to be
• It is not a forecast but a tool of analysis to help
the organization recognise weak signals
• Scenario planning helps managers to
overcome biases and imperfect reasoning
• Scenario planning helps managers to
recognise change that may not fit their theory
of business
Ex-Royal Dutch Shell has been using to evaluate its startegic
options since 70’s.It has given Shell a better success rate in its oil
forecasts compared to its competitors.
The General Environment

• They are not forecasts in the sense one is able to extrapolate


using past data.
•However they deal with the future and provide a tool of analysis for
the company to look at its current scenario.
• It improves decision making process against a background of
multiple future environments.
•It helps in making
1.More robust strategic decisions
2.Enhanced future planning
3.Improving communication throughout the company by providing a
context for decisions.
4.An aid to provide leadership to the company
The General Environment

Undertaking Scenario Planning

1. Define the Scope

2. Identify the Major Stakeholders

3. Identify Basic Trends

4. Identify Key Uncertainties

5. Construct Initial Scenario Themes


The General Environment

Undertaking Scenario Planning

6. Check for Consistency and Plausibility

7. Develop Learning Scenarios

8. Identify Research Needs

9. Develop Quantitative Models

10. Evolve Towards Decision Scenarios


SCENARIO PLANNING

Attempts to capture the richness and range of possibilities,stimulating decision


makers to consider changes they would otherwise ignore.

Organising into narratives that are easier to grasp and use than great volumes of
data.
They are aimed at challenging the existing mind-set.

Issues-Macro scenarios,despite their relevence are too general to be sufficient for


developing strategy in a particulat industry(Porter 1985)
Encourages management to think the unthinkable
Management needs to view events from a radically different perspective
Scenarios to be effective must encourage the creation of robust strategies that
match the company,s limited resources with endless challenges in the external
environment.
It must also ensure maximum long term opportunities and threats facing the
company are identified and addressed
PEST ANALYSIS

• PEST analysis is useful for scanning the general environment


• PEST is political, economic, social, and technological factors
• PEST analysis can be used to identify weak signals that may
point to a discontinuity shaping the environment

• PEST provides a link between the general and competitive


environment

• Weak signals in the general environment can become forces for


change in the competitive environment
POLITICAL FACTORS

Deals with effects of Government policy.Includes legal elements,government


stability,taxation policy,government regulation.
MNC,s operating in multiple countries have high exposure to
factories,assets,manpower etc.
Hence stability of government and political systems need to be stable.
For Ex-Government policy of privatization opens up markets to
competition.Hence previously comfortable industries are forced to innovate and
cut costs to remain competitive.
New entrants enter a market with lower cost curves & innovative products and
services due to better use of technology and clear understanding of consumer
needs.

To avoid surprise elements,companies need to be scanning their environment


for signs of change in government policy which may impact their industry
Example-Air/sea disaster.New fuel standards/Carbon dioxide emissions
Managers need to develop a new mindset which recognizes environmental
improvement as a competitive opportunity rather than a threat.
ECONOMIC FACTORS

Key economic indicators include disposable income,interest rates,unemployment


rates,inflation,GDP and exchange rates
Economic data can be vague and ambiguous.It can never provide the complete
picture but a snapshot of economic phenomena.
Hence scanning and monitoring the general environment for signs of economic
shifts becomes difficult

Example-Construction/Manufacturing Industry is affected by increase in interest


rates.
Increase in interest rates affect exporters of good abroad but benefit importers
Exporters shall have to innovate to offset unfavourable exchange rate with
reduction in price or increase in quality.

In India RBI is the Central bank dealing with monetary policy and interest
rates.The economic data which they monitor often gives conflicting
signals.Patterns may make them believe that the economy is overheated and
hence increase interest rates.Implementing rate hike and its impact on the
economy may take over six months.By this time the economy make actually take
a downturn.Hence we need to exercise caution and judgement when using
PEST analysis.
SOCIAL FACTORS

Includes cultural changes within the environment and are referred to as socio-
cultural.

Demographic changes in the West is resulting in a increasing ageing population


creating issues for pension fund providers.People are living longer due to
healthy eating and advances in medical science.

Due to falling birth rates,Johnson & Johnson is targeting their baby care
products at the adult female audience.Its being marketed as being kind and
gentle to women,s skin as well as that of babies.This represents a response to
changes in the general environment that directly affects their industry.

Retail companies in the Western economy due to ageing population are


employing older manpower.Senior/retired employees are highly experienced and
their compassion can add value when serving customers.
TECHNOLOGICAL FACTORS

Responsible for creating major disruption in the competitive landscape


Amazon and Dell have leveraged the power of the internet to change traditional
retailing within their respective industries.
The medium of internet is being used for small/sme businesses for their
goods/services being demanded across geographies.
Technology has transformed industries like newspaper publishing,banking,
financial services, Insurance
Citibank-24 hours phone banking-The City Never Sleeps....
Dont come to the bank-The bank will come to you...
The rate of technological advancement is doubling every 18 months.....
The internet has been compared with the Industrial Revolution in terms of
changes it has brought about.
The impact of technological disruption and changing consumer preferences
continue to challenge the business models of the best of retailers across the
globe.
LIMITATIONS

The economic factors example suggests limitations dealing with macro


environment analysis
The rate of change of PEST factors in the general environment and their
increasing unpredictability limits the use of PEST analysis.

Experts argue that the competitive environment is the only true area for the
company to analyse since it has the greatest impact on the firm’s market and
products.
SWOT ANALYSIS
• SWOT analysis refers to strengths, weaknesses,
opportunities and threats
• Strengths and weaknesses refer to the organization’s
internal environment
• Opportunities and threats refer to the organisation’s external
environment over which it has much less control
• SWOT may arise in both the general and the competitive
environment
• The unpredictable nature of events in the general
environment make the use of SWOT analysis more
problematic
INFERENCE
Taken together scenario planning and PEST analysis can
help identify external opportunities and threats(OT) facing the
company.
The firm’s internal strengths and weaknesses (SW) can be
determined by auditing its resources and capabilities.

SWOT enables the company to assess its current strategy in


view of its changing environment and competitiors and help
turn potential threats into opportunities and weaknesses into
strengths.