Strategic Management is a systematic process of achieving desired objectives of an organization by proper allocation of its resources.
Strategic Management process starts with deciding objectives, allocating resources, and implementing planned programme to achieve desired objective. Environmental scanning is preliminary step for effective implementation of strategy. Environmental Scanning is the process of accessing the influence environmental factors in which organization is operating. One must prepare strategy keeping in mind these factors. For Example, if someone is planning to develop a production plant, he must choose the site in legislative permissible area, where access to raw materials, market is easy and other infrastructure like power, transport, labor are available.
Environment in which an organization is operating can be broadly divided into two categories, viz., Micro Environment (Industry) and Macro Environment. Macro environment is broader concept. It represents Political, Economical, Social, Technological, Legal factors acting in the environment of organizational setup. Micro Environment deals with Industry specific environment of an organization which includes labor supply, material supply and other infrastructure.
Let us discuss how Macro environment factors affecting organizational strategies.
- Political Factors: Changes in political scenario of an area (say, country or state) like change in governing party where an organization is working may result in changes in certain policies regulating the organization as every political party have its own views regarding economical development and they tend to change the policies as per their views when they get governing position, and thus it affect the strategy of an organization.
- Economical Factors: Economic trends in the country, business cycles are the economic factors which may affect organization. For Example, during depression demand for products may fall which will affect organizational production. Hence, strategy should be made keeping in mind such economic trends and tools to cope with them.
- Social Factors: Educational level, population size, income levels, etc. are some of the social factors which affect the business strategies. Higher income level shows high potential of consumption.
- Technological Factors: Now a day, technology is very volatile. Technological development may make organizational process outdated which may cause less production capacity in comparison to new technology and thus affect business strategy.
- Legal Factors: Changes in Laws governing organization, changes in labor laws can increase organizational expenses, may change working hours, etc. affecting its strategy.
These are the macro environmental factors. Strategist must consider effect which these factors may cause and plan strategy accordingly. Though changes in these factors can not be controlled by organizations, efforts are made to minimize (if happened) its negative impact.
Micro or Industry Environment is as specified in name consist of factors relating to specific industry.
- Labor Supply: Fluctuations in labor supply, quantity and quality of labor, wage expectation, strike, etc. result in fluctuations in organizational production. If labor go on strike, production stops and organization becomes unable to meet its production targets in time. Hence, labor is considered as sensitive component of micro environment.
- Material Supply: Availability of materials, delay in delivery of material, level of competition among suppliers may affect production and hence strategy of the organization.
- Infrastructure: Availability of Infrastructure like power, roads, machinery plays an important role in organizational strategy. For Example, if good transportation system is not available for transporting raw materials at production plant then production will be interrupted.
- Industry Specific Laws: Changes in laws relating to specific industries constitute industry’s micro environment which shall be considered while preparing strategy. If these are not taken into account, violation may happen attracting many legal charges.
These are the factors which constitute micro/industry environment of an organization. Changes in these factors affect the whole industry and its production, so the organization dealing with them properly leads in industry.
Thus, Environmental scanning is very important while preparing strategy. The models used for the purpose are as follows:
II. Porter’s Five Forces Model for Industrial Analysis:
Porter made a model for industry analysis. According to him, following five forces and their determinants determined industrial environment for an industry.
- Rivalry among competitors: Rivalry among competitors depends on size of organizations, product switching cost, cost of production, etc. Intense rivalry may cause powerful impact of even very small variations in strategy of rivals. For Example, If Coke reduces its price by a rupee, many person drinking Pepsi may opt Coke affecting its production.
- Threat of New Entrants: Entry of new firms depends on few elements such as cost of entry, economies of scale in particular industry, government legislation, etc. Possibility of new entrants affects industrial environment. Entry of new entrant result in reduced market share. For Example, Maruti’s share reduced after entry of Hyundai, Honda, etc companies.
- Power of Supplier: Suppliers play important role in an organization. Production can not be carried out unless we get raw material supplied by suppliers. Monopoly of supplier, cost of switching supplier, etc. are the factors which determine power of supplier.
- Threat of Substitutes: Substitutes are the products which may change customer’s preferences affecting product for organizational product’s demand. More the substitutes, more volatile will be the demand for that product. Thus, considering substitutes in strategy formation is very important.
- Power of Buyers: Buyers are the ultimate consumers of the product. Size and concentration of customers determines buyer’s power. Buyer’s willingness to buy and information available with them (regarding products) are the factors which affect business strategies in the form of buyer’s power.
After locating the factors for industrial scanning it is important to gather information regarding these forces from periodicals, sources revealing about market conditions, through surveys, etc. And interpreting information is very important so as to derive the exact position of organization in industry.
Thus, this model can be followed for industrial scanning. And using above mentioned model we can do environmental scanning effectively. Environmental scanning is preliminary step in strategic management; many strategic decisions are based on its result. Hence, carrying out environmental scanning in best possible way with best interpretation is required which is made easy by these models for environmental scanning.