SECTION II

• Environmental Appraisal: Concept of environment, components of environment

(Economic, legal, social, political and technological). Environmental scanning techniques -
ETOP, QUEST and SWOT (TOWS).
• Corporate level strategies: Stability, Expansion, Retrenchment and Combination
strategies. Corporate restructuring. Concept of Synergy.
• Business level strategies: Porter’s framework of competitive strategies; Conditions, risks
and benefits of Cost leadership, Differentiation and Focus strategies. Location and timing
tactics. Concept, Importance, Building and use of Core Competence.

BUSINESS LEVEL STRATEGIES

Business strategy aims on improving the competitive position of a firm’s or business unit’s
products or services within the particular industry or market segment that the firm, or business unit
serves.
PORTER’S FRAMEWORK OF COMPETITIVE STRATEGIES
• Michael Porter's Generic Strategies are a useful framework for organisations to identify a
potential niche in which they can gain a competitive advantage in any industry.
• Michael Porter's 1985 book Competitive Advantage has served as the foundation for much
of modern business strategy. In it, Porter explained the different methods by which
organisations managed to develop a niche within any industry. A competitive advantage is
an advantage over competitors gained by offering consumers greater value, either by
means of lower prices or by providing greater benefits and service that justifies higher
prices.
• A firm position itself by leveraging its strengths. Michael Porter has argued that a firm's
strengths ultimately fall into one of two headings: cost advantage and differentiation. By
applying these strengths in either a broad or narrow scope, three generic strategies
result: cost leadership, differentiation, and focus. He then subdivided the Focus strategy
into two parts: "Cost Focus" and "Differentiation Focus."
• The terms "Cost Focus" and "Differentiation Focus" can be a little confusing, as they could
be interpreted as meaning "a
focus on cost" or "a focus on
differentiation." Remember that
Cost Focus means emphasizing
cost-minimization within a
focused market, and
Differentiation Focus means
pursuing strategic
differentiation within a focused
market.
1. Cost Leadership
• With this strategy, the objective is
to become the lowest-cost
producer in the industry.
• Organisations exhibiting cost-
leadership often exhibit a number
of traits and attributes which
make them suited for this
approach:

(a) Access to capital or technology required to drive costs down

(b) High levels of productivity
(c) High efficiency and capacity utilisation
(d) A low-cost base (e.g. labour, materials, facilities) and a method of maintaining this
(e) Use of bargaining power to negotiate low production costs
(f) Access to effective distribution channels

• Wal-Mart is famous for EDLP, achieved by developing close relationships with its suppliers
and vendors to achieve cost savings through large volume purchases and pass these
savings to the consumers.
• Dell Computers: achieved market share by keeping low inventories and only building
computers to order, procurement advantages from preferential access to raw materials, or
backward integration.
• Low-cost budget Irish based airlines Ryanair who despite having fewer planes than the
major airlines, were able to achieve market share growth by offering cheap, no-frills
services at prices much cheaper than those of the larger competitors.
2. Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that
are widely valued by buyers. It selects one or more attributes that many buyers in an industry
perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its
uniqueness with a premium price.
3. Focus
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry.
The focuser selects a segment or group of segments in the industry and tailors its strategy to
serving them to the exclusion of others.
The focus strategy has two variants.
(a) In cost focus a firm seeks a cost advantage in its target segment, while in
(b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the
focus strategy rest on differences between a focuser's target segment and other segments
in the industry. The target segments must either have buyers with unusual needs or else
the production and delivery system that best serves the target segment must differ from that
of other industry segments. Cost focus exploits differences in cost behaviour in some
segments, while differentiation focus exploits the special needs of buyers in certain
segments.
Choosing the Right Generic Strategy
• Your choice of which generic strategy to pursue underpins every other strategic decision
you make, so it's worth spending time to get it right.
• But you do need to make a decision: Porter specifically warns against trying to "hedge your
bets" by following more than one strategy. One of the most important reasons why this is
wise advice is that the things you need to do to make each type of strategy work appeal to
different types of people. Cost Leadership requires a very detailed internal focus on
processes. Differentiation, on the other hand, demands an outward-facing, highly creative
approach.
• So, when you come to choose which of the three generic strategies is for you, it's vital that
you take your organization's competencies and strengths into account.
Use the following steps to help you choose.
Step 1:
➢ For each generic strategy, carry out a SWOT Analysis of your strengths and weaknesses,
and the opportunities and threats you would face, if you adopted that strategy.
➢ Having done this, it may be clear that your organization is unlikely to be able to make a
success of some of the generic strategies.
Step 2:
➢ Use Five Forces Analysis to understand the nature of the industry you are in.
Step 3:
➢ Compare the SWOT Analyses of the viable strategic options with the results of your Five
Forces analysis. For each strategic option, ask yourself how you could use that strategy to:
❖ Reduce or manage supplier power.
❖ Reduce or manage buyer/customer power.
❖ Come out on top of the competitive rivalry.
❖ Reduce or eliminate the threat of substitution.
❖ Reduce or eliminate the threat of new entry.
 ❖ Select the generic strategy that gives you the strongest set of options.
Tip:
❖ Porter's Generic Strategies offer a great starting point for strategic decision-making.
❖ Once you've made your basic choice, though, there are still many strategic options
available. Bowman's Strategy Clock helps you think at the next level of details, because it
splits Porter's options into eight sub-strategies. You can also use USP Analysis and Core
Competence Analysis to identify the areas you should focus on to stand out in your
marketplace.
Key Points
❖ According to Porter's Generic Strategies model, there are three basic strategic options
available to organizations for gaining competitive advantage. These are: Cost Leadership,
Differentiation and Focus.
❖ Organizations that achieve Cost Leadership can benefit either by gaining market share
through lowering prices (whilst maintaining profitability) or by maintaining average prices
and therefore increasing profits. All of this is achieved by reducing costs to a level below
those of the organization's competitors.
❖ Companies that pursue a Differentiation strategy win market share by offering unique
features that are valued by their customers. Focus strategies involve achieving Cost
Leadership or Differentiation within niche markets in ways that are not available to more
broadly-focused players.
Competitive Tactics
Tactic – is a specific operating plan detailing how a strategy is to be implemented in terms
of when and where it is to be put into action. These include timing tactics (when) and
market location tactics (where).
Timing Tactics: When to Compete
▪ First mover – (or pioneer) is the first company to manufacture and sell a new product or
service.
▪ Late mover – may be able to imitate the technological advances of others, keep risks down
by waiting until a new market is established, and take advantage of the first mover’s
natural inclination to ignore market segments.
Market Location Tactics: Where to Compete
▪ Offensive tactic – usually takes place in an established competitor’s market location.
▪ Defensive tactic – usually takes place in the firm’s own current market position as a
defense against a possible attack by a rival.
Offensive Tactics methods:
1. Frontal assault – The attacking firm goes head to head with its competitor. It matches the
competitor in every category from price to promotion to distribution channel.
2. Flanking maneuver – Rather than going straight from a competitor’s position of strength
with a frontal assault, a firm may attack a part of the market where the competitor is weak.
3. Bypass attack – This tactic attempts to cut the market out from under the established
defender by offering a new type of product that makes the competitor’s product
unnecessary.
4. Encirclement – Attacking company or unit encircles the competitor’s position in terms of
products or markets or both. The encircle has greater product variety and/or serves more
markets.
5. Guerilla warfare – Instead of continual and extensive resource-expensive attack on a
competitor, a firm of business unit may choose to “hit and run.” It is characterized by the
use of small, intermittent assaults on different market segments held by the competitor.
Defensive Tactic methods:
1. Raise Structural Barriers – Entry barriers act to block a challenger’s logical avenue of
attack.
2. Increase Expected Retaliation – Is any action that increases the perceived threat of
retaliation for an attack. This counter-attack is especially important in markets that are very
important to the defending company or business unit.
3. Lower the Inducement for Attack – A third type of defensive tactic is to reduce a
challenger’s expectations of future profits in the industry. With the prices kept very low,
there is a little profit incentive for a new entrant.
CORE COMPETENCIES
Generally speaking, core competencies are the defining capabilities or advantages that
a business may have, and that distinguish it from competition. Core competence is the
foundation for sharpening a company's competitive edge and it guides brand reputation,
business growth, and marketing strategy.

The Origin of Core Competence

The concept of core competence originated as a resource-based approach to corporate
strategy; introduced by C.K. Prahalad and Gary Hamel in their 1990 book, "The Core
Competence of the Corporation," wherein they describe various core competencies as
meeting three universal conditions:

1. Relevance – The competence must give your customer something that strongly
influences him or her to choose your product or service. If it does not, then it has no
effect on your competitive position and is not a core competence.
2. Difficulty of imitation – The core competence should be difficult to imitate. This
allows you to provide products that are better than those of your competition. And
because you're continually working to improve these skills, means that you can
sustain its competitive position.
3. Breadth of application – It should be something that opens up a good number of
potential markets. If it only opens up a few small, niche markets, then success in
these markets will not be enough to sustain significant growth.
KEY TAKEAWAYS

• Core competencies are the defining characteristics that make a business or an

individual stand out from the competition.
• Identifying and exploiting core competencies is seen as important for a new
business making its mark or an established company trying to stay competitive.
• A company's people, physical assets, patents, brand equity, and capital all can
make a contribution to a company's core competencies.

Examples of Businesses With Strong Core Competencies

Walmart is the largest retail department store chain in the world, with global sales of over
514 billion dollars in 2019. The company has more than 5,368 locations in the U.S. and
another 5,993 internationally.2 Walmart's core competencies include:

• Massive buying power: Walmart's mantra is "everyday low prices". The multi-
national uses its mammoth purchasing power to constantly pressure suppliers to
lower wholesale costs.
• Supply chain management: Walmart excels at all aspects of supply chain
management. It has a massive network of distribution centers and has refined
purchasing, operations, distribution, and integration into an extremely efficient
system of inventory management. This results in better stocking of products in
 stores and lower costs. Walmart was instrumental in the development of
the Universal Product Code (the barcode) and was the first company to implement it
on a company-wide basis to collect and analyze data from individual stores.

Apple is the largest company in the world with 961.3 billion in market value.3 The company
has over 137,000 employees worldwide and generated $260 billion in revenue in
2019.4 Apple has very strong core competencies:

• Innovation: Apple has a long history of developing unique and innovative

technology products, including the Mac computer, the iPod, iPhone, iPad, Apple TV,
and the Apple Watch. Apple founders Steve Jobs and Steve Wozniak developed the
Apple 1 in 1976 and went on to develop the Apple Macintosh and other revolutionary
tech devices. Even when it's not the first company to develop a new product, Apple
is often the one that's able to take a new product, engineer it in a unique fashion,
and make it an enormous commercial success (for example, the release of the
iPhone practically killed the sales of Blackberry devices within a few years).
• Brand recognition: Fans of Apple products tend to be extremely loyal to the
brand. It's not uncommon for consumers to line up for many hours or days for a new
iPhone or other Apple product release. Many Apple users purchase every new
release of the iPhone, even if their current model is only a year old. Apple has brand
loyalty that is the envy of corporations everywhere.
• Marketing: Apple is a consistent winner of awards for marketing excellence. The
Apple marketing philosophy revolves around understanding the needs of the
customer, focusing on building innovative but intuitive products and devices that all
work insync.

Costco: Costco is the world's largest membership-based warehouse chain. As of 2019, it

boasts 785 warehouses worldwide, over $149 billion in sales, and 254,000 employees
worldwide.5 Costco prides itself on the following core competencies:

• Customer service: With its free shipping and unmatched return policy Costco is
famous for its customer service.
• Value: Costco's high-volume, bulk sales model allows the company to charge very
low prices on a wide variety of quality products. In fact, many small business use
Costco as a wholesale source.
• Employee recognition: Costco is well known for taking care of its employees by
paying a living wage, providing health benefits, and offering generous retirement
packages. According to Costco, the company prides themselves on, "emphasizing
inclusion and diversity, providing resources to enrich and inspire, supporting
leadership training, and promoting from within."

CORPORATE LEVEL STRATEGIES

CONCEPT OF SYNERGY
Synergy is the concept that the combined value and performance of two companies will be
greater than the sum of the separate individual parts. Synergy is a term that is most
commonly used in the context of mergers and acquisitions (M&A). Synergy, or the potential
financial benefit achieved through the combining of companies, is often a driving force
behind a merger.

KEY TAKEAWAYS
• Synergy is the concept that the value and performance of two companies combined
will be greater than the sum of the separate individual parts.
 • If two companies can merge to create greater efficiency or scale, the result is what is
sometimes referred to as a synergy merge.
• The expected synergy achieved through a merger can be attributed to various
factors, such as increased revenues, combined talent, and technology, or cost
reduction.
Understanding Synergy
Mergers and acquisitions (M&A) are made with the goal of improving the company's
financial performance for the shareholders. Two businesses can merge to form one
company that is capable of producing more revenue than either could have been able to
independently, or to create one company that is able to eliminate or streamline redundant
processes, resulting in significant cost reduction. Because of this principle, the potential
synergy is examined during the M&A process. If two companies can merge to create
greater efficiency or scale, the result is what is sometimes referred to as a synergy merge.

Shareholders will benefit if a company's post-merger share price increases due to the
synergistic effect of the deal. The expected synergy achieved through the merger can be
attributed to various factors, such as increased revenues, combined talent, and
technology, or cost reduction.

For example, when Proctor & Gamble Company acquired Gillette in 2005, a P&G news
release cited that "the increases to the company's growth objectives are driven by the
identified synergy opportunities from the P&G/Gillette combination. The company
continues to expect cost synergies of approximately $1 to $1.2 billion…and an increase in
the annual sales run-rate of about $750 million by 2008." In the same press release, then
P&G chairman, president, and chief executive A.G. Lafley stated, "…We are both industry
leaders on our own, and we will be even stronger and even better together." This is the
idea behind synergy—that by combining two companies the financial results are greater
than what either could have achieved alone.

In addition to merging with another company, a company may also attempt to create
synergy by combining products or markets. For example, a retail business that sells
clothes may decide to cross-sell products by offering accessories, such as jewelry or belts,
to increase revenue.

A company can also achieve synergy by setting up cross-disciplinary workgroups, in which

each member of the team brings with him or her a unique skill set or experience. For
example, a product development team may consist of marketers, analysts, and R&D
experts. This team formation could result in increased capacity and workflow and,
ultimately, a better product than all the team members could produce if they work
separately.

Synergy can also be negative. Negative synergy is derived when the value of the
combined entities is less than the value of each entity if it operated alone. This could result
if the merged firms experience problems caused by vastly different leadership styles and
company cultures.
Synergy is reflected on a company's balance sheet through its goodwill account. Goodwill
is an intangible asset that represents the portion of the business value that cannot be
attributed to other business assets. Synergies may not necessarily have a monetary value
but could reduce the costs of sales and increase profit margin or future growth. In order for
synergy to have an effect on the value, it must produce higher cash flows from existing
assets, higher expected growth rates, longer growth periods, or lower cost of capital.
 CORPORATE RESTRUCTURING
The Corporate Restructuring is the process of making changes in the composition of a
firm’s one or more business portfolios in order to have a more profitable enterprise. Simply,
reorganizing the structure of the organization to fetch more profits from its operations or is
best suited to the present situation.
Corporate restructuring is an action taken by the corporate entity to modify its capital
structure or its operations significantly. Generally, corporate restructuring happens when a
corporate entity is experiencing significant problems and is in financial jeopardy.

Introduction
The process of corporate restructuring is considered very important to eliminate all the
financial crisis and enhance the company’s performance. The management of concerned
corporate entity facing the financial crunches hires a financial and legal expert for advisory
and assistance in the negotiation and the transaction deals. Usually, the concerned entity
may look at debt financing, operations reduction, any portion of the company to interested
investors.
In addition to this, the need for a corporate restructuring arises due to the change in the
ownership structure of a company. Such change in the ownership structure of the company
might be due to the takeover, merger, adverse economic conditions, adverse changes in
business such as buyouts, bankruptcy, lack of integration between the divisions, over
employed personnel, etc.

Types of Corporate Restructuring

i. Financial Restructuring: This type of restructuring may take place due to a severe fall in
the overall sales because of the adverse economic conditions. Here, the corporate entity
may alter its equity pattern, debt-servicing schedule, the equity holdings, and cross-holding
pattern. All this is done to sustain the market and the profitability of the company.
ii. Organisational Restructuring: The Organisational Restructuring implies a change in the
organisational structure of a company, such as reducing its level of the hierarchy,
redesigning the job positions, downsizing the employees, and changing the reporting
relationships. This type of restructuring is done to cut down the cost and to pay off the
outstanding debt to continue with the business operations in some manner.

Reasons for Corporate Restructuring

Corporate restructuring is implemented in the following situations:

Change in the Strategy: The management of the distressed entity attempts to improve its
performance by eliminating its certain divisions and subsidiaries which do not align with the
core strategy of the company. The division or subsidiaries may not appear to fit
strategically with the company’s long-term vision. Thus, the corporate entity decides to
focus on its core strategy and dispose of such assets to the potential buyers.

Lack of Profits: The undertaking may not be enough profit making to cover the cost of
capital of the company and may cause economic losses. The poor performance of the
undertaking may be the result of a wrong decision taken by the management to start the
division or the decline in the profitability of the undertaking due to the change in customer
needs or increasing costs.
 Reverse Synergy: This concept is in contrast to the principles of synergy, where the value
of a merged unit is more than the value of individual units collectively. According to reverse
synergy, the value of an individual unit may be more than the merged unit. This is one of
the common reasons for divesting the assets of the company. The concerned entity may
decide that by divesting a division to a third party can fetch more value rather than owning
it.

Cash Flow Requirement: Disposing of an unproductive undertaking can provide a

considerable cash inflow to the company. If the concerned corporate entity is facing some
complexity in obtaining finance, disposing of an asset is an approach in order to raise
money and to reduce debt.

Characteristics of Corporate Restructuring

• To improve the Balance Sheet of the company (by disposing of the unprofitable division
from its core business)
• Staff reduction (by closing down or selling off the unprofitable portion)
• Changes in corporate management
• Disposing of the underutilised assets, such as brands/patent rights.
• Outsourcing its operations such as technical support and payroll management to a more
efficient 3rd party.
• Shifting of operations such as moving of manufacturing operations to lower-cost locations.
• Reorganising functions such as marketing, sales, and distribution.
• Renegotiating labour contracts to reduce overhead.
• Rescheduling or refinancing of debt to minimise the interest payments.
• Conducting a public relations campaign at large to reposition the company with its
consumers.

Important Aspects to be Considered in Corporate Restructuring Strategies

• Legal and procedural issues

• Accounting aspects
• Human and Cultural synergies
• Valuation and funding
• Taxation and Stamp duty aspects
• Competition aspects etc.

Types of Corporate Restructuring Strategies

1. Merger: This is the concept where two or more business entities are merged together
either by way of absorption or amalgamation or by forming of a new company. The merger
of two or more business entities is generally done by exchange of securities between the
acquiring and the target company.
2. Demerger: Under this corporate restructuring strategy, two or more companies are
combined into a single company to get the benefit of synergy arising out of such a merger.
3. Reverse Merger: In this strategy, the unlisted public companies have the opportunity to
convert into a listed public company, without opting for IPO (Initial Public offer). In this
strategy, the private company acquires a majority shareholding in the public company with
its own name.
4. Disinvestment: When a corporate entity sells out or liquidates an asset or subsidiary, it is
known as “divestiture”.
5. Takeover/Acquisition: Under this strategy, the acquiring company takes overall control of
the target company. It is also known as the Acquisition.
6. Joint Venture (JV): Under this strategy, an entity is formed by two or more companies to
undertake financial act together. The entity created is called the Joint Venture. Both the
parties agree to contribute in proportion as agreed to form a new entity and also share the
expenses, revenues and control of the company.
7. Strategic Alliance: Under this strategy, two or more entities enter into an agreement to
collaborate with each other, in order to achieve certain objectives while still acting as
independent organisations.
8. Slump Sale: Under this strategy, an entity transfers its one or more undertaking for lump
sum consideration. Under Slump Sale, an undertaking is sold for a consideration
irrespective of the individual values of the assets or liabilities of the undertaking.

STABILITY, EXPANSION, RETRENCHMENT AND COMBINATION STRATEGIES.

Strategies used to make decisions regarding the allocation of resources or pursuing an
operational strategy are often categorized as stability strategies, expansion (growth)
strategies, retrenchment strategies, or combination strategies. Each is dealt with below.
Grand Strategies
Definition: The Grand Strategies are the corporate level strategies designed to identify the firm’s
choice with respect to the direction it follows to accomplish its set objectives. Simply, it involves
the decision of choosing the long term plans from the set of available alternatives. The Grand
Strategies are also called as Master Strategies or Corporate Strategies.

There are four grand strategic

alternatives that can be followed
by the organization to realize its
long-term objectives:

1. Stability Strategy
2. Expansion Strategy
3. Retrenchment Strategy
4. Combination Strategy

The grand strategies are concerned with the decisions about the allocation and transfer of
resources from one business to the other and managing the business portfolio efficiently,
such that the overall objective of the organization is achieved. In doing so, a set of
alternatives are available to the firm and to decide which one to choose, the grand
strategies help to find an answer to it.

Business can be defined along three dimensions: customer groups, customer functions
and technology alternatives. Customer group comprises of a particular category of people
to whom goods and services are offered, and the customer functions mean the particular
service that is being offered. And the technology alternatives covers any technological
changes made in the operations of the business to improve its efficiency.

1. STABILITY STRATEGY
Definition: The Stability Strategy is adopted when the organization attempts to maintain its
current position and focuses only on the incremental improvement by merely changing one or
more of its business operations in the perspective of customer groups, customer functions and
technology alternatives, either individually or collectively.
 Generally, the stability strategy is adopted by the firms that are risk averse, usually the
small scale businesses or if the market conditions are not favorable, and the firm is
satisfied with its performance, then it will not make any
significant changes in its business operations. Also, the
firms, which are slow and reluctant to change finds the
stability strategy safe and do not look for any other
options.

Stability Strategies could be of three types:

1. No-Change Strategy
2. Profit Strategy
3. Pause/Proceed with Caution Strategy

To have a better understanding of Stability Strategy go through the following examples in

the context of customer groups, customer functions and technology alternatives.

1. The publication house offers special services to the educational institutions apart from its
consumer sale through the market intermediaries, with the intention to facilitate a bulk
buying.
2. The electronics company provides better after-sales services to its customers to make the
customer happy and improve its product image.
3. The biscuit manufacturing company improves its existing technology to have the efficient
productivity.

In all the above examples, the companies are not making any significant changes in their
operations, they are serving the same customers with the same products using the same
technology.

i. NO-CHANGE STRATEGY
Definition: The No-Change Strategy, as the name itself suggests, is the stability strategy
followed when an organization aims at maintaining the present business definition. Simply, the
decision of not doing anything new and continuing with the existing business operations and the
practices referred to as a no-change strategy.

When the environment seems to be stable, i.e. no threats from the competitors, no
economic disturbances, no change in the strengths and weaknesses, a firm may decide to
continue with its present position. Therefore, by analyzing both the internal and external
environments, a firm may decide to continue with its present strategy.

The no-change strategy does not imply that no decision has been taken by the firm,
however, taking no decision can sometimes be a decision itself. There should be a clear
distinction between the firms which are inactive and do not want to make changes in their
strategies and the ones which consciously decides to continue with their present business
definition by scrutinizing both the internal and external conditions.

Generally, the small or mid-sized firms catering to the needs of a niche market, which is
limited in scope, rely on the no-change strategy. This stability strategy is suitable till no
new threats emerge in the market, and the firm feels the need to alter its present position.
ii. PROFIT STRATEGY
Definition: The Profit Strategy is followed when an organization aims to maintain the profit by
whatever means possible. Due to lower profitability, the firm may cut costs, reduce investments,
raise prices, increase productivity or adopt any methods to overcome the temporary difficulties.

The profit strategy can be followed when the problems are temporary or short-lived and will
go away with time. The problems could be the economic recession or inflation, industry
downturn, worst market conditions, competitive pressure, government policies and the like.
Till then, the firm adopts the artificial measures to tackle these problems and sustain the
profitability of the firm.

If the problem persists for long, then profit strategy would only deteriorate the firm’s overall
financial position. In the crisis, the companies may overcome the temporary difficulties by
selling the assets such as land or building or setting off the losses of one division against
the profits of another division. Also, the firms may offer the outsourcing facilities to those
firms who are in need of it and can realize the temporary cash.

The profit strategy focuses on capitalizing the situation when the obsolete technology or
the old technology is to be replaced with the new one. Here no new investment is made;
the same technology is followed, at least partially with new technological domains.

iii. PAUSE/PROCEED WITH CAUTION STRATEGY

Definition: The Pause/Proceed with Caution Strategy is well understood by the name itself, is a
stability strategy followed when an organization wait and look at the market conditions before
launching the full-fledged grand strategy. Also, the firm that has intensely followed the expansion
strategy would wait till the time the new strategies seeps down the organizational levels and look
at the changes in the organizational structure before taking the next step.

Like the Profit Strategy, the Pause/Proceed with Caution strategy is also a temporary
strategy followed by the firms. But however, these both differ significantly; the profit
strategy focuses on sustaining profitability until the temporary difficulties or the conditions
become more hospitable. Whereas the Pause/Proceed with caution strategy is a deliberate
action taken by the firm to postpone the strategic action till the best opportunity knocks at
the door. Thus, waiting for the right strategy for the right time.

The pause/proceed with caution strategy is often followed by the manufacturing companies
who study the market conditions thoroughly and then launch their new products into the
market. It is more prevalent in the army attacks; wherein the reconnaissance party moves
ahead to examine the situation before the troops, who comes in full strength to ultimately
attack the enemies.

2. EXPANSION STRATEGY
Definition: The Expansion Strategy is adopted by an organization when it attempts to achieve a
high growth as compared to its past achievements. In other words, when a firm aims to grow
considerably by broadening the scope of one of its business operations in the perspective of
customer groups, customer functions and technology alternatives, either individually or jointly, then
it follows the Expansion Strategy.

The reasons for the expansion could be survival, higher profits, increased prestige,
economies of scale, larger market share, social benefits, etc. The expansion strategy is
 adopted by those firms who have managers with a high degree of achievement and
recognition. Their aim is to grow, irrespective of the risk and the hurdles coming in the way.

The firm can follow either of the five expansion

strategies to accomplish its objectives:

1. Expansion through Concentration

2. Expansion through Diversification
3. Expansion through Integration
4. Expansion through Cooperation
5. Expansion through Internationalization

Go through the examples below to further

comprehend the understanding of the expansion
strategy. These are in the context of customer
groups, customer functions and technology alternatives.

1. The baby diaper company expands its customer groups by offering the diaper to old aged
persons along with the babies.
2. The stockbroking company offers the personalized services to the small investors apart
from its normal dealings in shares and debentures with a view to having more business
and a diversified risk.
3. The banks upgraded their data management system by recording the information on
computers and reduced huge paperwork. This was done to improve the efficiency of the
banks.

In all the examples above, companies have made significant changes to their customer
groups, products, and the technology, so as to have a high growth.

i. EXPANSION THROUGH CONCENTRATION

Definition: The Expansion through Concentration is the first level form of Expansion Grand
strategy that involves the investment of resources in the product line, catering to the needs of the
identified market with the help of proven and tested technology.

Simply, the strategy followed when an organization coincides its resources into one or
more of its businesses in the context of customer needs, functions and technology
alternatives, either individually or collectively, is called as expansion through concentration.

The organization may follow any of the ways to practice

Expansion through concentration:

▪ Market penetration strategy: The firm focusing

intensely on the existing market with its present
product.
▪ Market Development type of concentration:
Attracting new customers for the existing product.
▪ Product Development type of Concentration:
Introducing new products in the existing market.
 The firms prefer expansion through concentration because they are required to do things
what they are already doing. Due to the familiarity with the industry the firm likes to invest
in the known businesses rather than a new one. Also, through concentration strategy, no
major changes are made in the organizational structure, and expertise is gained due to an
in-depth knowledge about one or more businesses.

However, the expansion through concentration is risky since these strategies are highly
dependent on the industry, so any adverse conditions in the industry can affect the
business drastically. Also, the huge investments made in a particular business may suffer
losses due the invention of new technology, market fickleness, and product obsolescence.

ii. EXPANSION THROUGH DIVERSIFICATION

Definition: The Expansion through Diversification is followed when an organization aims at
changing the business definition, i.e. either developing a new product or expanding into a new
market, either individually or jointly. A firm adopts the expansion through diversification strategy, to
prepare itself to overcome the economic downturns.

Generally, the diversification is made to set off the losses of one business with the profits
of the other; that may have got affected due to the adverse market conditions. There are
mainly two types of diversification strategies undertaken by the organization:

1. Concentric Diversification: When an organization acquires or develops a new product or

service that are closely related to the organization’s existing range of products and
services is called as a concentric diversification. For example, the shoe manufacturing
company may acquire the leather manufacturing company with a view to entering into the
new consumer markets and escalate sales.
2. Conglomerate Diversification: When an organization
expands itself into different areas, whether related or
unrelated to its core business is called as a conglomerate
diversification. Simply, conglomerate diversification is when
the firm acquires or develops the product and services that
may or may not be related to the existing range of product
and services.

Generally, the firm follows this type of diversification through

a merger or takeover or if the company wants to expand to
cover the distinct market segments. ITC is the best example
of conglomerate diversification.

iii. EXPANSION THROUGH INTEGRATION

Definition: The Expansion through Integration means
combining one or more present operation of the business with
no change in the customer groups. This combination can be
done through a value chain.

The value chain comprises of interlinked activities

performed by an organization right from the procurement
of raw materials to the marketing of finished goods. Thus,
a firm may move up or down the value chain to focus
more comprehensively on the needs of the existing
customers.
 The expansion through integration widens the scope of the business and thus considered
as the grand expansion strategy. There are two ways of integration:

Vertical integration: The vertical integration is of two types: forward and backward. When
an organization moves close to the ultimate customers, i.e. facilitate the sale of the finished
goods is said to have made a forward integration. Example, the manufacturing firm open
up its retail outlet.

Whereas, if the organization retreats to the source of raw materials, is said to have made a
backward integration. Example, the shoe company manufactures its own raw material such
as leather through its subsidiary firm.

Horizontal Integration: A firm is said to have made a horizontal integration when it takes
over the same kind of product with similar marketing and production levels. Example, the
pharmaceutical company takes over its rival pharmaceutical company.
iv. EXPANSION THROUGH COOPERATION
Definition: The Expansion through Cooperation is a strategy followed when an organization
enters into a mutual agreement with the competitor to carry out the business operations and
compete with one another at the same time, with the objective to expand the market potential.

The expansion through cooperation can be done by following any of the strategies
as explained below:

1. Merger: The merger is the combination of two or more firms wherein one acquires the
assets and liabilities of the other in the exchange of cash or shares, or both the
organizations get dissolved, and a new organization came into the existence.

The firm that acquires another is said to have made an acquisition, whereas, for the other
firm that gets acquired, it is a merger.

2. Takeover: Takeover strategy is the other method of

expansion through cooperation. In this, one firm acquires
the other in such a way, that it becomes responsible for
all the acquired firm’s operations.

The takeovers can either be friendly or hostile. In the

former, both the companies agree for a takeover and
feels it is beneficial for both. However, in the case of a
hostile takeover, a firm try to take on the operations of
the other firm forcefully either known or unknown to the
target firm.

3. Joint Venture: Under the joint venture, both the firms agree to combine and carry out the
business operations jointly. The joint venture is generally done, to capitalize the strengths
of both the firms. The joint ventures are usually temporary; that lasts till the particular task
is accomplished.
4. Strategic Alliance: Under this strategy of expansion through cooperation, the firms unite
or combine to perform a set of business operations, but function independently and pursue
the individualized goals. Generally, the strategic alliance is formed to capitalize on the
expertise in technology or manpower of either of the firm.
 Thus, a firm can adopt either of the cooperation strategies depending on the nature of
business line it deals in and the pursued objectives.

v. EXPANSION THROUGH INTERNATIONALIZATION

Definition: The Expansion through
Internationalization is the strategy followed by an
organization when it aims to expand beyond the
national market. The need for the Expansion through
Internationalization arises when an organization has
explored all the potential to expand domestically and
look for the expansion opportunities beyond the
national boundaries.

But however, going global is not an easy task, the

organization has to comply with the stringent
benchmarks of price, quality and timely delivery of
goods and services, that may vary from country to
country.

The expansion through internationalization could be done by adopting either of the

following strategies:

1. International Strategy: The firms adopt an international strategy to create value by

offering those products and services to the foreign markets where these are not available.
This can be done, by practicing a tight control over the operations in the overseas and
providing the standardized products with little or no differentiation.
2. Multidomestic Strategy: Under this strategy, the multi-domestic firms offer the
customized products and services that match the local conditions operating in the foreign
markets. Obviously, this could be a costly affair because the research and development,
production and marketing are to be done keeping in mind the local conditions prevailing in
different countries.
3. Global Strategy: The global firms rely on low-cost structure and offer those products and
services to the selected foreign markets in which they have the expertise. Thus, a
standardized product or service is offered to the selected countries around the world.
4. Transnational Strategy: Under this strategy, the firms adopt the combined approach of
multi-domestic and global strategy. The firms rely on both the low-cost structure and the
local responsiveness i.e. according to the local conditions. Thus, a firm offers its
standardized products and services and at the same time makes sure that it is in line with
the local conditions prevailing in the country, where it is operating.

So, in order to globalize, the firm should assess the international environment first, and
then should evaluate its own capabilities and plan the strategies accordingly to enter into
the foreign markets.
 3. RETRENCHMENT STRATEGY
Definition: The Retrenchment Strategy is adopted when an organization aims at reducing its
one or more business operations with the view to cut expenses and reach to a more stable
financial position.

In other words, the strategy followed, when a firm decides

to eliminate its activities through a considerable reduction
in its business operations, in the perspective of customer
groups, customer functions and technology alternatives,
either individually or collectively is called as
Retrenchment Strategy.

The firm can either restructure its business operations or

discontinue it, so as to revitalize its financial position.
There are three types of Retrenchment Strategies:

1. Turnaround
2. Divestment
3. Liquidation

To further comprehend the meaning of Retrenchment Strategy, go through the following

examples in terms of customer groups, customer functions and technology alternatives.

1. The book publication house may pull out of the customer sales through market
intermediaries and may focus on the direct institutional sales. This may be done to slash
the sales force and increase the marketing efficiency.
2. The hotel may focus on the room facilities which is more profitable and may shut down the
less profitable services given in the banquet halls during occasions.
3. The institute may offer a distance learning programme for a particular subject, despite
teaching the students in the classrooms. This may be done to cut the expenses or to use
the facility more efficiently, for some other purpose.

In all the above examples, the firms have made the significant changes either in their
customer groups, functions and technology/process, with the intention to cut the expenses
and maintain their financial stability.

i. TURNAROUND STRATEGY
Definition: The Turnaround Strategy is a retrenchment strategy followed by an organization
when it feels that the decision made earlier is wrong and needs to be undone before it damages
the profitability of the company.

Simply, turnaround strategy is backing out or retreating from the decision wrongly made
earlier and transforming from a loss making company to a profit making company.

Now the question arises, when the firm should adopt the turnaround strategy? Following
are certain indicators which make it mandatory for a firm to adopt this strategy for its
survival. These are:

▪ Continuous losses
▪ Poor management
▪ Wrong corporate strategies
▪ Persistent negative cash flows
▪ High employee attrition rate
▪ Poor quality of functional management
▪ Declining market share
▪ Uncompetitive products and services
Also, the need for a turnaround strategy arises because of the changes in the external
environment Viz, change in the government policies, saturated demand for the product, a
threat from the substitute products, changes in the tastes and preferences of the
customers, etc.

Example: Dell is the best example of a turnaround strategy. In 2006. Dell announced the
cost-cutting measures and to do so; it started selling its products directly, but unfortunately,
it suffered huge losses. Then in 2007, Dell withdrew its direct selling strategy and started
selling its computers through the retail outlets and today it is the second largest computer
retailer in the world.

ii. DIVESTMENT STRATEGY

Definition: The Divestment Strategy is another form of retrenchment that includes the
downsizing of the scope of the business. The firm is said to have followed the divestment strategy,
when it sells or liquidates a portion of a business or one or more of its strategic business units or a
major division, with the objective to revive its financial position.

The divestment is the opposite of investment; wherein the firm sells the portion of the
business to realize cash and pay off its debt. Also, the firms follow the divestment strategy
to shut down its less profitable division and allocate its resources to a more profitable one.

An organization adopts the divestment strategy only when the turnaround strategy proved
to be unsatisfactory or was ignored by the firm. Following are the indicators that mandate
the firm to adopt this strategy:

▪ Continuous negative cash flows from a particular division

▪ Unable to meet the competition
▪ Huge divisional losses
▪ Difficulty in integrating the business within the company
▪ Better alternatives of investment
▪ Lack of integration between the divisions
▪ Lack of technological upgradations due to non-affordability
▪ Market share is too small
▪ Legal pressures
Example: Tata Communications is the best example of divestment strategy. It has started
the process of selling its data center business to reduce its debt burden.

iii. LIQUIDATION STRATEGY

Definition: The Liquidation Strategy is the most unpleasant strategy adopted by the
organization that includes selling off its assets and the final closure or winding up of the business
operations.
It is the most crucial and the last resort to retrenchment since it involves serious
consequences such as a sense of failure, loss of future opportunities, spoiled market
image, loss of employment for employees, etc.

The firm adopting the liquidation strategy may find it difficult to sell its assets because of
the non-availability of buyers and also may not get adequate compensation for most of its
assets. The following are the indicators that necessitate a firm to follow this strategy:
▪ Failure of corporate strategy
▪ Continuous losses
▪ Obsolete technology
▪ Outdated products/processes
▪ Business becoming unprofitable
▪ Poor management
▪ Lack of integration between the divisions

Generally, small sized firms, proprietorship firms and the partnership firms follow the
liquidation strategy more often than a company. The liquidation strategy is unpleasant, but
closing a venture that is in losses is an optimum decision rather than continuing with its
operations and suffering heaps of losses.

4. COMBINATION STRATEGY
Definition: The Combination Strategy means making the use of other grand strategies (stability,
expansion or retrenchment) simultaneously. Simply, the combination of any grand strategy used
by an organization in different businesses at the same time or in the same business at different
times with an aim to improve its efficiency is called as a combination strategy.

Such strategy is followed when an organization is large and complex and consists of
several businesses that lie in different industries, serving different purposes. Go through
the following example to have a better understanding of the combination strategy:

* A baby diaper manufacturing company augments its offering of diapers for the babies to
have a wide range of its products (Stability) and at the same time, it also manufactures
the diapers for old age people, thereby covering the other market segment (Expansion). In
order to focus more on the diapers division, the company plans to shut down its baby
wipes division and allocate its resources to the most profitable division (Retrenchment).

In the above example, the company is following all the three grand strategies with the
objective of improving its performance. The strategist has to be very careful while selecting
the combination strategy because it includes the scrutiny of the environment and the
challenges each business operation faces. The Combination strategy can be followed
either simultaneously or in the sequence.

Environmental Appraisal
CONCEPT OF ENVIRONMENT
Business Environment means a collection of all individuals, entities and other factors,
which may or may not be under the control of the organisation, but can affect its
performance, profitability, growth and even survival.
Every business organisation operates in a distinctive environment, as it cannot exist in
isolation. Such an environment influence business and also gets affected by its activities.
 Components of Business Environment
The Business Environment is broadly classified,
into two categories:

1. Internal Environment: The factors which exist

within the organisation, imparting strength or
causing weakness to the organisation, comes
under internal environment. It includes:
▪ Value System
▪ Vision and Mission
▪ Objectives
▪ Corporate Culture
▪ Human Resources
▪ Labor Union
2. External Environment: External Environment consists of those factors which provide an
opportunity or pose threats to the business. It is further classified as:
▪ Micro Environment: The immediate periphery of the business that has a continuous
and direct impact on it is called Micro Environment. It includes suppliers, customers,
competitors, market, intermediaries, etc. which are specific to the business.
▪ Macro Environment: Macro Environment, is one such environment that influences the
functioning and performance of every business organisation, in general. It comprises of
the demographic, socio-cultural, legal, political, technological, and global environment.
All business enterprises, functions within an environment, called as the business
environment. An individual business firm survives and grows within the periphery of its
environment.

A firm is only a part of a big environment, and so there are only a few factors which are
under the control of the firm.

So, the firm has no other option, but to respond and adapt accordingly. If business persons
possess a good understanding of the business environment, they can easily recognise,
analyse and react to the forces that affect the firm.

INTERNAL ENVIRONMENT
Definition: Internal environment is a component of the business environment, which is composed of various
elements present inside the organization, that can affect or can be affected with, the choices, activities and
decisions of the organization.

It encompasses the climate, culture, machines/equipment, work and work processes,

members, management and management practices.

In other words, the internal environment refers to the culture, members, events and factors
within an organization that has the ability to influence the decisions of the organization,
especially the behaviour of its human resource. Here, members refer to all those people
 which are directly or indirectly related to the organization such as owner, shareholders,
managing director, board of directors, employees, and so forth.

FACTORS INFLUENCING INTERNAL ENVIRONMENT

The factors which are under the control of the organization, but can influence business
strategy and other decisions are termed as
internal factors. It includes:
1. Value System: Value system consists of all
those components that are a part of regulatory
frameworks, such as culture, climate, work
processes, management practices and norms of
the organization. The employees should
perform the activities within the purview of this
framework.
2. Vision, Mission and Objectives: The
company’s vision describes its future position,
mission defines the company’s business and
the reason for its existence and objectives
implies the ultimate aim of the company and the
ways to reach those ends.
3. Organizational Structure: The structure
of the organization determines the way in
which activities are directed in the
organization so as to reach the ultimate goal. These activities include the delegation
of the task, coordination, the composition of the board of directors, level of
professionalization, and supervision. It can be matrix structure, functional structure,
divisional structure, bureaucratic structure, etc.
4. Corporate Culture: Corporate culture or otherwise called an organizational culture
refers to the values, beliefs and behaviour of the organization that ascertains the
way in which employees and management communicate and manage the external
affairs.
5. Human Resources: Human resource is the most valuable asset of the organization,
as the success or failure of an organization highly depends on the human resources
of the organization.
6. Physical Resources and Technological Capabilities: Physical resources refers to
the tangible assets of the organization that play an important role in ascertaining the
competitive capability of the company. Further, technological capabilities imply the
technical know-how of the organization.

Internal environmental factors have a direct impact on a firm. Further, these factors can be
altered as per the needs and situation, so as to adapt accordingly in the dynamic business
environment.

MICRO ENVIRONMENT
Definition: Micro Environment, refers to the environment comprising of all the actors of an organization’s
immediate environment which influences the performance of the company, as they have a direct bearing on
the firm’s regular business operations.

The micro environment is popularly referred to as task environment or operating

environment.
ELEMENTS OF MICRO ENVIRONMENT
The elements of the micro environment are closely associated with the company and they
do not affect all the companies operating in the industry, in a similar manner, as some
factors are specific to the firm.

So we can say that the micro environment is one which the firm addresses in its specific
arena, such as the industry or the strategic group.

Given below are some important elements of micro

environment:

Competitors
Competition is what keeps the firm thriving.
Competitors are the rival sellers operating in the same
industry. It must be noted that the nature and intensity
of competition highly influence the firm’s products and services. Product Differentiation is
something that helps the firm to beat the cut-throat competition in the market.

For a firm to survive competition it is required to keep a close watch on the competitors
(both existing and potential) future moves and actions, so as to prepare in advance, as well
as to predict the response of competitors to company’s moves. Moreover, competitor
analysis also helps in maintaining or improving market share and position.

Suppliers
Suppliers are the one who provides inputs such as material, components, labour and other
stock of goods to the firm, which is required to undertake manufacturing activities. when
there is uncertainty as to the supply constraints, it usually builds pressure on the firms and
they are required to maintain high inventories, which leads to cost increases.

Suppliers have the power to change the firm’s position in the market and its capabilities.

The relationship amidst the firm and its suppliers represents a power equation, based on
the industry conditions and their dependence on each other.

Customers
The success of the organization greatly depends on how effectively the firm fulfils the
needs and wants of the customers, which is profitable to the firm and also provides value
to the customer. The firm needs to analyze what the customers expect from their products
and services so that the firm can satisfy them.

It must be noted that without customers no business can survive for a long time. So, the
primary objective of the firm is to create and retain customers, to keep itself going.
Intermediaries
Intermediaries refer to marketing intermediaries which cover agents, merchants,
distributors, dealers, wholesalers, etc. that participate in the company’s supply chain, in
stocking and transporting the goods from their source location to their destination.

It acts as a link between the business organization and the ultimate consumer.

Shareholders
Shareholders are the real owners of the company who invest their money in the company’s
business, by purchasing the shares, for which they are paid a dividend every year as a
return. Shareholders have the right to vote in the company’s general meeting.

Employees
Placing the right person at the right job and retaining them for the long term by keeping the
staff motivated is very important for the strategic planning process. Training and
development act as a guide to the firm’s employees which ensures an up-to-date
workforce.

A qualified and competent workforce can help the firm to achieve success with little efforts.

Media
We all know the power of media these days, it can make or break an organization or its
products/services overnight.

Management of media whether electronic media, press media or social media is really
important not just to create a positive and clean image of the company and its products in
front of the audience but also to support the firm in building a good reputation in the
market. The right use of media can do wonders for the company and boost its sales.

When the firm competes with the firm operating in the same industry, with the same micro
environmental factors, the relative success of the company is based on the relative
effectiveness of the company in dealing with these factors.

MACRO ENVIRONMENT
Definition: Macro Environment can be described as the collection of those factors and conditions, which has
the capability of influencing the business positively or negatively.

Macro Environment is the type of external business environment in which the firm and its
micro-environmental forces exist which gives opportunities or pose threats to the firm. It
comprises of the elements which are uncontrollable, dynamic and unpredictable.

Elements of Macro Environment

It must be noted that the macro-environmental factors affect the working of every firm
operating in the economy because the changes in the conditions are economy-wide and
not sector or industry-wide. Come, let’s discuss these elements:

Political-Legal Environment
Political Environment covers the actions of the
government, that have a bearing on the company’s
operations. Further, the span of implementation of these
actions i.e. local level, state-level or national level, is
significant in this regard. The top management of the
company has to keep a close watch on the actions of the
government to take decisions accordingly.

It can be influenced by bureaucracy, tariffs, trade control,

corruption level, tax policy, competition regulation and
changes in different laws.

Moreover, legal environment covers the laws of the country, the changes in which might
affect the functioning of the business, as every organization works within the framework of
law and adhere to these laws strictly. These laws may include minimum wage laws, worker
safety laws, company law, union law, etc.

Economic Environment
The economic environment encompasses a number of factors such as nature and
structure of the economy, availability of resources, level of income, GDP, rate of inflation,
degree of economic development, distribution of income, factors of production, economic
policies, economic conditions, monetary policy, fiscal policy, licensing policy, etc. which
influences the business of a firm.

Further, the lending rates of the bank determines the investment level in any country, such
the higher the rate of interest the lower will be the investment made by people.

Socio-Cultural Environment
Society and Culture are an important part of the business environment. It won’t be wrong
to say that society shapes the norms beliefs, values, attitude, and principles in the people,
in which they are raised.

When we are talking about culture, we are stressing on the dance, drama, music, food,
lifestyle and festivals. It also includes arts, law, morals, customs, traditions and habits.
Goods and services bought and sold, highly depends on the culture prevalent in the
region. Moreover, it also describes the attitude of people towards work.

For instance, there is a boom in the demand for clothes, electronic items, flowers, fruits,
sweets, vehicles, etc at the time of festivals or new year. Further, it must be noted that the
consumption, lifestyle and dressing style of people vary in different societies and cultures.
Technological Environment
Technology is updating every second and to keep the business going in the long run, the
firm has to put efforts to go side by side with the changing technology. How much firm is
focusing on innovation and research and development plays a great role in its success,
because it can make the firm first and fast mover, in that technology.

The factors included are a type of technology presently in use, technological development
level, technology policy, suitable technologies, the rate at which new technologies are
adopted and diffused.

Demographic Environment
Demographic Environment covers the type, size and growth rate of population in the area
in which the business operates. It discusses the education level, household patterns, age
distribution, regional characteristics, level of income, level of consumption of the
population.

Here, it must be noted that the marketing mix and the product type the organization
introduces, largely depends on the demographic environment. The pricing, distribution and
promotional strategies are also based on the demography itself.

Global Environment
After globalization, the companies see the whole world as a market where they can
introduce and sell their product and service. However, companies need to adhere to the
laws of the countries in which they are operating their businesses, as well as global laws.

Along with that, they need to conduct market research before setting up a company in
another country. Further, they have to be familiar with the local language, so as to run the
business effectively.

The global environment covers all the factors that have an impact on the businesses
operating at the transnational, cross-cultural level and across the border.

The success of a company greatly relies on the fact that how the firm is able to adapt itself
and reacts to the changing business environment. The elements of the macro environment
strongly influence the strategies and decisions of the firm.

Further, if there are any changes in the macro-environmental conditions, then it may have
a far-reaching impact on the company’s business operations, performance and profitability.

ENVIRONMENTAL SCANNING TECHNIQUES - ETOP, QUEST

AND SWOT (TOWS)
Every organization has an internal and external environment. In order for the organization to
be successful, it is important that it scans its environment regularly to assess
its developments and understand factors that can contribute to its success. Environmental
scanning is a process used by organizations to monitor their external and internal
environments.

Environmental Scanning

The purpose of the scan is the identification of

opportunities and threats affecting the business for
making strategic business decisions. As a part of the
environmental scanning process,
the organization collects information regarding its
environment and analyzes it to forecast the impact of
changes in the environment. This eventually helps the
management team to make informed decisions.
As seen from the figure above, environmental scanning should primarily identify opportunities
and threats in the organization’s environment. Once these are identified, the organization can
create a strategy which helps in maximizing the opportunities and minimizing the threats.
Before looking at the important factors for environmental scanning, let’s take a quick peek at
the components of an organization’s environment.

Components of a Business Environment

As you can see above,

the internal environment
of an organization
consists of various
elements like the value
system,
mission/objectives of the
organization, structure,
culture, quality of
employees, labor unions,
technological capabilities,
etc. These elements lie
within the organization
and any changes to them
can affect the overall success of the business.

On the other hand, an organization cannot operate in a vacuum. Also, there are many factors
outside the walls of an organization which affects the functions of the business. These factors
constitute the external environment of an organization.

The internal environment offers strengths and weaknesses to business while the external
environment brings opportunities and threats. The four influencing environmental factors
known as SWOT Analysis are:

1. Strength – an inherent capacity of an organization which helps it gain a strategic

advantage over its competitors.
2. Weakness – an inherent constraint or limitation which creates a strategic disadvantage
for a business.
3. Opportunity – a favorable condition in the organization’s environment enabling it to
strengthen its position.
4. Threat – an unfavorable condition in the organization’s environment causing damage to
the organization.

Important Factors for Environmental Scanning

Before scanning the environment, an organization must take the following actors
into consideration:

• Events – These are specific occurrences which take place in different environmental
sectors of a business. These are important for the functioning and/or success of the
business. Events can occur either in the internal or the external environment.
Organizations can observe and track them.
• Trends – As the name suggests, trends are general courses of action or tendencies
along which the events occur. They are groups of similar or related events which tend
to move in a specific direction. Further, trends can be positive or negative. By observing
trends, an organization can identify any change in the strength or frequency of the
events suggesting a change in the respective area.
• Issues – In wake of the events and trends, some concerns can arise. These are
Issues. Organizations try to identify emerging issues so that they can take corrective
measures to nip them in the bud. However, identifying emerging issues is a difficult
task. Usually, emerging issues start with a shift in values or change in which the
concern is viewed.
• Expectations – Some interested groups have demands based on their concern for
issues. These demands are Expectations.
1. Environmental Threat and Opportunity Profile
Analysis (ETOP)
ETOP is considered as a useful device that
facilitates an assessment of information related to
the environment and also in determining the
relative significance of external environment
threats and opportunities to systematically evaluate
environmental scanning. By dividing the
environment into different sections, the ETOP
analysis helps in analyzing its impact on the
organization. The analysis is based on threats and
opportunities in the environment.

2. Quick Environmental Scanning Technique Analysis (QUEST)

QUEST is an environmental scanning technique that is designed to assist with
organizational strategies by keeping adheres to change and its implications. Different
steps involved in this technique are as follows:

▪ The process of environmental scanning starts with the observation of the

organization’s events and trends by strategists.
▪ After observation, important issues that may impact the organization are considered
using environment appraisal.
▪ A report is created by making a summary of these issues and their impact.
▪ In the final step, planners who are responsible for deciding the feasibility of the
proposed strategy, review reports.
3. SWOT Analysis
SWOT analysis stands for strengths, weaknesses, opportunities and threats analysis of a
business environment. Strengths and
weaknesses are an organization’s internal
factor while threats and opportunities are
considered as external factors. So, the
process of SWOT analysis includes the
systematic analysis of these factors to
determine an effective marketing strategy. It is
a tool that is used by the organization for
auditing purposes to find its different key
problems and issues.

These are identified through internal and

external environmental analysis.

Internal environment analysis/ scanning

Different factors are considered while analyzing the internal environment of an organization
like the structure of the organization, physical location, the operational capacity and
efficiency of the organization, market share, financial resources, skills and expertise of
employees, etc.

Strengths: The strength of any organization is related to its core competencies i.e.
efficient resources or technology or skills or advantages over its competitors. For
example, the marketing expertise of a firm can be its strength. Apart from this, an
organization’s strength can be:
▪ Strong customer relations
▪ Market leader in its product or services
▪ Sound market image and reputation
▪ Smooth cash-flows
Weaknesses: A weakness or limitation of an organization is related to the scarcity of its
resources or skill-set of staff or capabilities that creates an adverse effect on its
performance. For example, limited cash-flow and high cost are considered as a financial
weakness of the organization. Similarly, other weaknesses can be:
▪ Poor product quality
▪ Low productivity
▪ Unrecognized brand name or poor brand image
External environment analysis/scanning
Different factors that are considered while scanning the external environment of the
organization like Competitors, customers, suppliers, technology, social and economic
factors, political and legal issues, market trends, etc.

Opportunities: An opportunity of the organization’s environment is considered as its most

favorable situation. These are the circumstances that are external to the business and can
become an advantage to the organization. For example, different opportunities for a firm
can be:
▪ Social media marketing
▪ Mergers & acquisitions
▪ Tapping new markets
▪ Expansion in International market
 ▪ New product development
Threats: Threats of an organization are current or future unfavorable situations that may
occur in its external environment. For example, below are a few major threats for a firm:
▪ A new competitor in the market
▪ The slow growth of the market
▪ Changing customer preferences
▪ Increase in the bargaining power of consumers
▪ Change in regulations or major technical changes
4. PEST Analysis
PEST technique for a firm’s environmental scanning
includes analysis of political, economic, social, and
technical factors of the environment.

a) Political/ Legal factors: Different factors like

changes in tax policy, availability of raw material, etc.
creates a direct effect on a business. So
organizations are required to constantly monitor tax-
related policy changes as an increase in tax may
increase the heavy financial burden on them.
Similarly, different laws like “Consumer protection
act” also play an important role in an organization’s
operation activities as it is important to abide by the
act.
More examples can be foreign trade policy, political changes, regulations in competition,
trade restrictions, etc. also considered as different political/ legal factors that exist in the
external business environment.
b) Economic factors: Different economical Factors like the unemployment rate, inflation,
cost of labor, economic trends, disposable income of consumers, monetary policies, etc.
play an important role in environmental scanning.
For example, in the case of high unemployment, a company may decrease the prices of
its products or services and in opposite situation i.e. when the unemployment rate is low
then prices can be high. This happens because if more customers are unemployed then by
lowering the prices, an organization can attract them.
c) Social / Cultural factors: Attitude, trends, and behavioral aspects of society also create
an impact on the functioning of the organization. Studying and understanding the lifestyle
of consumers is very much required to target the right audience and to offer the right
product or services based on their preferences.
For example, Issues and policies related to the environment like pollution control are also
being considered by organizations to ensure that it operates in an environment-friendly
atmosphere. Taking care of the cultural aspect of different countries while doing business
at the international level, is also an important factor.
d) Technological Factors: Technological factors affect the way firms produce products
and services as well as market them. Like, “processes based on new technologies” is one
of the important factors of a technological environment. To maximize profits, production
should be handled most cost-effectively and this, technology has an important contribution.
For example, an increase in computer and internet-based technology is playing a major
role in the way organizations are distributing and marketing their products and services.
Also, different advancements in technologies like automation of the manual process and
use of machinery based on more advanced and latest technologies, more investment in
research & development by organizations have increased their efficiency by increasing
production in less time, cost-reduction and better investment in the long run.