Transcript Environmental Analysis Techniques & Impact for Organization Growth

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
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
2
The Important Question
Why 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
3
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 ?
4
Environmental uncertainty is based on
three types of situations

Simple/Static

Dynamic

Complex
5
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
6
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.
7
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
8
External Factors that influence
change fall into four categories
Fiscal Policies
Market Factors
Labour
Technological innovations
9
Fiscal Policies





Interest Rate
Exim Policies
Taxation Structure
Inflation
Currency Rate
10
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
11
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.
12
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.
13
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.
14
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.
15
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.
16
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.
17
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
18
PEST Analysis in an overall Environment
19
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.
20
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; and
Thirdly, 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.
21
How to use the tool:
PEST is a simple mnemonic standing for Political,
Economic, Socio-Cultural and Technological.
22
Using the 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.
23
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
24
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
25
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
26
Technological Environment:




Impact of emerging technologies
Impact of Internet, reduction in communications costs
and increased remote working
Research & Development activity
Impact of technology transfer
27
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.
28
PORTER’S DIAMOND
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.
30
The ”Diamond”
FIRM STRATEGY,
STRUCTURE, AND
RIVALRY
FACTOR
CONDITIONS
DEMAND
CONDITIONS
RELATED AND
SUPPORTING
INDUSTRIES
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.
32
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.
33
RELATED AND SUPPORTING
INDUSTRIES

a set of strong related and supporting
industries is important to the
competitiveness of firms.
34
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.
35
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.
36
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.
37
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)
38


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)
39
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
40
Requirements of Scenarios






consistent and robust
coherent
possible and probable
provide structured understanding and
plausible.
defensible.
41
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.
42
References






Organization Management Handout, By Prof.
Vinayshil Gautam.
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
43